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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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  • Mohammed I. Ansari, 2004. "Sustainability of the US current account deficit: An econometric analysis of the impact of capital inflow on domestic economy," Journal of Applied Economics, Universidad del CEMA, vol. 7, pages 249-269, November.
  • Handle: RePEc:cem:jaecon:v:7:y:2004:n:2:p:249-269
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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.

    More about this item

    Keywords

    current account; capital inflow;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • O51 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - U.S.; Canada

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