THE FELDSTEIN-HORIOKA PUZZLE AND TWIN DEFICITS IN PAKISTAN

The previous literature points to a high correlation between domestic rates of investment and saving among OECD countries. Some take this as evidence of limited financial integration in the industrialized world. This paper tries to find any evidence of Feldstein-Horioka (F-H) puzzle in the presence of Twin deficits for Pakistan using annual time series data for the period 1972 to 2008. The cointegration results found evidence in favor of a high degree of capital mobility byrejecting the F-H puzzle in case of Pakistan. So, F-H puzzle not exists although Pakistan is not perfectly integrated in to the world economy.