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The Causal Relationship between Foreign Direct Investment and Current Account: An Empirical Investigation for Pakistan Economy

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  • Siddiqui, Danish Ahmed
  • Ahmad, Mohsin Hasnain

Abstract

This paper investigates relationship between FDI and current account (CA) in Pakistan using the Johansen-Juselius cointegration technique and the Granger causality test. The study results indicate that FDI and CA are cointegrated and thus exhibit a reliable long run relationship. The Granger causality test findings indicate that the causality between FDI and CA is uni-directional. However, there is no short run causality from FDI to CA and vice versa. Therefore, as a policy implication that FDI inflows may cause to the deterioration of the balance of payments in the long run should be taken into account when policy makers decide to implement policies to attract foreign investors.

Suggested Citation

  • Siddiqui, Danish Ahmed & Ahmad, Mohsin Hasnain, 2007. "The Causal Relationship between Foreign Direct Investment and Current Account: An Empirical Investigation for Pakistan Economy," MPRA Paper 19743, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:19743
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    References listed on IDEAS

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    1. 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.
    2. Manuel Agosin & Roberto Machado, 2005. "Foreign Investment in Developing Countries: Does it Crowd in Domestic Investment?," Oxford Development Studies, Taylor & Francis Journals, vol. 33(2), pages 149-162.
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    4. Chuhan, Punam & Perez-Quiros, Gabriel & Popper, Helen, 1996. "International capital flows : do short-term investment and direct investment differ?," Policy Research Working Paper Series 1669, The World Bank.
    5. Engle, R. F. & Granger, C. W. J. (ed.), 1991. "Long-Run Economic Relationships: Readings in Cointegration," OUP Catalogue, Oxford University Press, number 9780198283393.
    6. Fry, Maxwell J. & Claessens,Constantijn A. & Burridge, Peter & Blanchet, Marie-Christine, 1995. "Foreign direct investment, other capital flows, and current account deficits : what causes what?," Policy Research Working Paper Series 1527, The World Bank.
    7. Ghosh, Atish R & Ostry, Jonathan D, 1995. "The Current Account in Developing Countries: A Perspective from the Consumption-Smoothing Approach," The World Bank Economic Review, World Bank, vol. 9(2), pages 305-333, May.
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    Cited by:

    1. Hussain Ali Bekhet & Raed Walid Al-Smadi, 2016. "The dynamic causality between FDI inflow and its determinants in Jordan," International Journal of Economics and Business Research, Inderscience Enterprises Ltd, vol. 11(1), pages 26-47.
    2. Predrag TRPESKI & Marijana CVETANOSKA & Kristijan KOZHESKI, 2021. "The Impact Of Foreign Direct Investments On Economic Growth And Trade: A Panel Approach Of Selected Western Balkan Countries," Management Research and Practice, Research Centre in Public Administration and Public Services, Bucharest, Romania, vol. 13(3), pages 23-31, September.
    3. Bekhet, Hussain Ali & Al-Smadi, Raed Walid, 2015. "Determinants of Jordanian foreign direct investment inflows: Bounds testing approach," Economic Modelling, Elsevier, vol. 46(C), pages 27-35.

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    More about this item

    Keywords

    Asia; Pakistan; Cointegration; Granger; causality; FDI; Current Assount; error correction;
    All these keywords.

    JEL classification:

    • F2 - International Economics - - International Factor Movements and International Business
    • P45 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - International Linkages
    • F3 - International Economics - - International Finance
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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