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Fiscal stance, foreign capital inflows and the behavior of current account in the Asian countries

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  • Ahmad Zubaidi Baharumshah

    () (Universiti Putra Malaysia)

  • Siew-Voon Soon

    (Universiti Putra Malaysia)

  • Mark E. Wohar

    (University of Nebraska at Omaha
    Loughborough University)

Abstract

Abstract This paper investigates the causality relationship between budget and current account deficits for 14 Asian countries. The major findings based on bootstrap Granger causality tests in heterogenous mixed panels are: First, investments (and foreign capital inflows) have a notable impact on the current account prior to the Asian financial crisis of 1997–1998. Second, we detect direct causality between the budget and the current account imbalances before but not after the crisis. The data suggest that the current account targeting hypothesis, that is, the reverse causality, prevails after the crisis. Third, budget deficits have a significant influence on both investment and foreign capital inflows in the second period. Fourth, Asian countries are less susceptible to the influence of FDI inflows in the aftermath of the crisis. Finally, structural break turns out crucial in assessing the causal patterns of the twin deficits nexus in the Asian countries.

Suggested Citation

  • Ahmad Zubaidi Baharumshah & Siew-Voon Soon & Mark E. Wohar, 2019. "Fiscal stance, foreign capital inflows and the behavior of current account in the Asian countries," Empirical Economics, Springer, vol. 56(2), pages 523-549, February.
  • Handle: RePEc:spr:empeco:v:56:y:2019:i:2:d:10.1007_s00181-017-1368-5
    DOI: 10.1007/s00181-017-1368-5
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    Keywords

    Global imbalances; Twin deficit hypothesis; FDI; Crisis; Asian;

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General

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