Alternative Concept of the Feldstein-Horioka Model under a Variable Parameter Assumption: a Study of the Czech Republic's Accession to the European Union

Abstract

Alternative Concept of the Feldstein-Horioka Model under a Variable Parameter Assumption: a Study of the Czech Republic’s Accession to the European Union We investigate the impact of the Czech Republic’s membership in the European Union on capital mobility. Our estimation of capital mobility is based on the alternative Feldstein-Horioka model. The model comes from intertemporal budget constraints with the additional assumption of a different data generation process. We propose an empirical framework to capture two different regimes in the vector error correction model. We show that the period 1996–2004 is composed of both regimes. The most important conclusion is that the period 1996–2004 is connected with a mix of both regimes. However, the period 2005–2017 comprises only one regime, which is connected with higher capital mobility. Therefore, capital mobility in the Czech Republic increased after 2004.