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Causal Relationship Between the Current Account and Financial Account

  • Ho-don Yan

We demonstrate that a different causal relationship exists between the current and financial accounts in developed and developing countries. Using the Granger causality test, we clearly determine that the financial account is by and large responsible for the current account in developing countries; instead of financing the current account, the financial account thrusts the current account into an imbalance. In developed countries, however, the current account leads the way, and the financial account, as its name indicates, serves to finance a current account imbalance. This represents a forewarning that countries, which lack a sophisticated financial system to channel funds to proper locations, should not recklessly liberalize capital mobility. Copyright International Atlantic Economic Society 2005

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File URL: http://hdl.handle.net/10.1007/s11294-005-3012-y
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Article provided by International Atlantic Economic Society in its journal International Advances in Economic Research.

Volume (Year): 11 (2005)
Issue (Month): 2 (May)
Pages: 149-162

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Handle: RePEc:kap:iaecre:v:11:y:2005:i:2:p:149-162
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