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Sustainability of the US current account deficit: An econometric analysis of the impact of capital inflow on domestic economy

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    Abstract

    The purpose of this paper is to estimate, by using the recent econometric techniques of unit root testing and Johansen-Juselius cointegration technique (1990), the impact of foreign capital inflow on the volume and efficiency of domestic investment in the United States during the period, 1973-1999. A battery of diagnostic tests is employed to check the validity and robustness of the estimated results. Evidence suggests that capital inflows have had a significant positive effect on the volume of US investment, but the effect on the efficiency of investment has been minimal. These findings imply that, while achieving current account balance is important, it is equally important to sustain and augment the beneficial impact of capital inflow by creating a more conducive investment climate. Given our limited ability to influence current account balance, this seems to be a more pragmatic policy option for dealing with the US current account imbalance.

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    File URL: http://www.cema.edu.ar/publicaciones/download/volumen7/ansari.pdf
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    Bibliographic Info

    Article provided by Universidad del CEMA in its journal Journal of Applied Economics.

    Volume (Year): VII (2004)
    Issue (Month): (November)
    Pages: 249-269

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    Handle: RePEc:cem:jaecon:v:7:y:2004:n:2:p:249-269

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    Keywords: current account; capital inflow;

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    1. Papanek, Gustav F, 1973. "Aid, Foreign Private Investment, Savings, and Growth in Less Developed Countries," Journal of Political Economy, University of Chicago Press, vol. 81(1), pages 120-30, Jan.-Feb..
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    3. Murthy, N. R. Vasudeva & Phillips, Joseph M., 1996. "The relationship between budget deficits and capital inflows: Further econometric evidence," The Quarterly Review of Economics and Finance, Elsevier, vol. 36(4), pages 485-494.
    4. Paul Krugman, 1995. "Currencies and Crises," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262611090, December.
    5. Rousseau, Peter L & Wachtel, Paul, 1998. "Financial Intermediation and Economic Performance: Historical Evidence from Five Industrialized Countries," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(4), pages 657-78, November.
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    7. Stoneman, Colin, 1975. "Foreign capital and economic growth," World Development, Elsevier, vol. 3(1), pages 11-26, January.
    8. Voivodas, Constantin S, 1974. " Exports, Foreign Capital Inflow, and South Korean Growth," Economic Development and Cultural Change, University of Chicago Press, vol. 22(3), pages 480-84, April.
    9. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    10. Matthew Higgins & Thomas Klitgaard, 1998. "Viewing the current account deficit as a capital inflow," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 4(Dec).
    11. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
    12. Papanek, Gustav F, 1972. "The Effect of Aid and other Resource Transfers on Savings and Growth in Less Developed Countries," Economic Journal, Royal Economic Society, vol. 82(327), pages 934-50, September.
    13. Weisskopf, Thomas E., 1972. "The impact of foreign capital inflow on domestic savings in underdeveloped countries," Journal of International Economics, Elsevier, vol. 2(1), pages 25-38, February.
    14. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
    15. Areskoug, Kaj, 1973. "Foreign-Capital Utilization and Economic Policies in Developing Countries," The Review of Economics and Statistics, MIT Press, vol. 55(2), pages 182-89, May.
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    Cited by:
    1. Aßmann, Christian, 2008. "Assessing the Effect of Current Account and Currency Crises on Economic Growth," Economics Working Papers 2008,01, Christian-Albrechts-University of Kiel, Department of Economics.
    2. Aßmann, Christian, 2007. "Determinants and Costs of Current Account Reversals under Heterogeneity and Serial Correlation," Economics Working Papers 2007,17, Christian-Albrechts-University of Kiel, Department of Economics.

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