Abstract

This paper analyses the Feldstein-Horioka puzzle in 15 sub-Saharan African countries accounting for the correlation between inward and outward capital flows. Applying cross section, panel data, and even time series analyses, we show that our results are consistent with previous studies related to developing countries.  More interesting, we confirm, for sub-Saharan African countries, the recent hypothesis of Georgepoulos and Hejazi (2009) that the Feldstein-Horioka home bias is unrelated to the correlation between inward and outward capital flows for developing countries. Although the saving-investment coefficient weakens in the correlation adjusted regression, we show that the coefficient on Flows, the variable which accounts for the correlation between inward and outward capital flows is always positive and insignificant. We argue that the downward movement in the saving-investment coefficient is due the omission of some factors (foreign aid and trade openness) which are relevant for developing countries in the framework of the Feldstein-Horioka analysis. We also state that our results are more likely to reflect the poor financial structure of the countries in our sample. Therefore, we suggest that policymakers in Sub-Sahara Africa should put more emphasis in creating and developing efficient financial market which could favor portfolio diversification.

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