Country Size and Investment-Saving Correlation: A Panel Threshold Error Correction Model

The Feldstein-Horioka puzzle has caused by the substantial disagreement about the interpretation of the saving-retention coefficient. Baxter and Crucini (1993) propose a general equilibrium model to show that the investment-saving correlation will be large when the country-size, measured by GNP, is large. This paper evaluates this argument by examining the threshold effect of country-size on the saving-retention coefficients. Evidence from a panel of 24 OECD countries confirms this hypothesis.