International Capital Flows and the Frankel-Dooley-Mathieson Puzzle

Frankel et al (1986) pointed out that industrialized countries have larger saving rate coefficients than do developing countries in the framework of Feldstein-Horioka puzzle. This is referred to as the Frankel-Dooley-Mathieson puzzle in this paper. This paper extends past analyses by incorporating indices of a domestic institutional and policy environment. Applying the resulting model to Sub-Saharan African countries, saving rate coefficients larger than those previously imagined were obtained. These results are consistent with the reality of capital regulations and other factors resulting in low capital flows in developing countries.