Foreign Capital Inflows and the Current Account Imbalance: Which Causality Direction?

Abstract

The ongoing financial globalization has instigated growing concerns on the issue of benefits and costs from free international capital mobility. Past experiences in the emerging market countries indicate that foreign capital inflows could cause persistent current account deficits and lead to currency crises. This paper empirically demonstrates that foreign capital inflows and current account imbalances interact in different ways between developed countries and emerging market countries. Using the Granger non-causality test, we find that foreign capital inflows Granger-cause the current account in the cases of emerging market countries, while a causal relation is negligently detected in the cases of developed countries. Indeed, distinct from developed countries, the current accounts of emerging market countries are susceptible to the influence of foreign capital inflows. Given the relatively immature financial markets, emerging market countries should be cautious while embracing financial globalization and prudent measures to manage large capital inflows are necessary.

The causal relationship between current account and financial account balance in Western Balkan countries: The case of Serbia

“…Autor je došao do zaključka o postojanju jednostrane uzročnosti od FR prema TR za Hrvatsku i Sloveniju, odnosno od TR prema FR za Poljsku i Rumuniju, dok je u slučaju Mađarske otkrivena dvosmerna uzročnost. Yan & Yang (2008) su empirijski dokazali da priliv stranog kapitala može prouzrokovati perzistentnost deficita TR i dovesti do valutne krize. Takođe je pokazano da se priliv stranog kapitala i neravnoteža računa kapitala prepliću na različite načine između zemalja u razvoju i zemalja sa tržištem u nastajanju.…”

Türkiye de Cari İşlemler Hesabı ile Finans Hesabı Arasındaki Nedensellik İlişkisi

“…Cari işlemler hesabı ile finans hesabı arasındaki ilişkiyi inceleyen bazı çalışmalarda (Yan, 2005;Yan, 2007;Yan and Yang, 2008;Guerin, 2003) incelemiştir. Analiz sonucunda, net sermaye girişlerinin GOÜ'lerde cari hesap dengesizliğine neden olurken, sanayileşmiş ülkelerde ise net sermaye girişlerinin cari hesap dengesizliğine neden olmadığı tespit edilmiştir.…”

Evaluation of Sustainability of Current Account Deficits in Turkey

“…Furthermore, although Turkey had sound macroeconomic fundamentals and fiscal discipline in the last decade, capital inflows were mostly the result of ample global liquidity. These types of capital inflows, which Yan and Yang [24] defines as push factors, is more likely to cause current account imbalances in the future. Also, after the huge public enterprises' privatization come to an end and together with 2008 world economic crisis, share of FDI in financing account was much lower than the previous couple of years while the share of portfolio investments sharply increased in 2010.…”