Puzzling out the Feldstein–Horioka paradox for Turkey by a time-varying parameter approach

Abstract

This study would like to contribute to the existing literature on the Feldstein-Horioka paradox by focusing on Turkey for the period 1960-2014 and by scrutinizing the correlation between domestic savings and investments within a time-varying parameter approach (which is warranted especially for emerging countries due to their political and economic instability and due to the frequency of policy changes). Our time-varying parameter approach is able to capture the impact of various economic and political interruptions on the correlation between domestic savings and investments, especially the military coups in the early 1960s, 1970s and 1980s, and the economic and financial crises in the mid-1990s, in the late 1990s, and in the early 2000s, as well as the financial crises affecting various countries in the globe in the late 1990s and 2000s. Our empirical analysis suggests a high correlation between domestic savings and investments in the 1960s, which was decreasing (increasing) during the 1970s (1980s), and which was decreasing since the 1990s. Furthermore, in the post-2002 era, with a further decline in the correlation coefficient, the saving-investment nexus has turned out to be statistically insignificant.