A dynamic factor approach to domestic capital mobility

This article analyzes capital mobility within Japan based on the consumption-based correlation method developed by Obstfeld (Capital mobility: the impact on consumption, investment and growth, Cambridge University Press, Cambridge, 1994). This theory suggests that consumption in one region is closely related to that in other regions if the capital market is open. We test this theoretical implication in the panel data context using the dynamic factor model which enables us to estimate unobservable common factors. Then we provide evidence of perfect capital mobility and capital integration having advanced rapidly between 1965 and 1975. Furthermore, the common factor is found to affect regional consumption heterogeneously and to be closely associated with stock returns.