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MENTAL MODEL · M4573

Feldstein-Horioka Puzzle

Feldstein-Horioka Puzzle
BusinessHigh supportMacroeconomics
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Updated 2026-08-02

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INTRODUCTION

English translation pending.

CORE DEFINITION

Reported by Martin Feldstein and Charles Horioka in 1980, the puzzle is that investment rates track domestic saving rates closely across countries, as if capital never left home. In a world of perfect mobility, saving should flow to wherever returns are highest, regardless of where it originates. Explanations include home bias, capital controls, and the fact that both variables respond to common long-run factors.

SCAFFOLDING EFFECT

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- Test the textbook: compare theoretical capital mobility with what cross-country data actually show - Suspect home bias: expect capital, talent, and trust to stay near their legal and cultural home - Diagnose the friction: ask whether controls, information gaps, or risk aversion explain the gap

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If capital moved freely, a country's investment would be financed wherever returns were best and would bear no relation to its own saving. Persistent correlation implies that savings mostly stay home, which points to frictions such as home bias, regulation, and shared long-run drivers of both variables. The finding is a puzzle because the theory predicted no such link.

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Source support: Explicit

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    en.wikipedia.orghttps://en.wikipedia.org/wiki/Feldstein%E2%80%93Horioka_puzzleZH · Explicit
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