Impact of the Euro on Domestic Saving and International Capital Flows

We examine a panel data set comprised of 12 European Union countries to assess the impact of the euro common currency on the saving-investment relationship (specified by the Feldstein-Horioka puzzle). In addition, to better assess the true differences among the causal relationships, the panel data has been separated into pre-euro (1970-1998) and post-euro periods (1999-2015), respectively. The empirical framework used consists of a variety of cross-sectional dependency tests; a Pesaran panel unit-root test, a Westerlund panel cointegration test, the Dynamic OLS method, and a Dumitrescu- Hurlin Granger causality test. The main results indicate a declining trend in savings retention coefficients after the elimination of exchange-rate risk and the initiation of Euro, which validates the argument that the saving-investment correlation has become useful for explaining intranational capital mobility and current account dynamics.