Analyzing the Impact of Foreign Capital Inflows on the Current Account Balance in Developing Economies: A Panel Data Approach

Ali, Amjad and Audi, Marc (2023): Analyzing the Impact of Foreign Capital Inflows on the Current Account Balance in Developing Economies: A Panel Data Approach.

Abstract

This research has explored the effects of foreign capital inflows on the current account deficit in developing countries from 1995 to 2020. The study considers various factors such as import demand, export demand, foreign direct investment, foreign debt, economic growth, foreign remittances, and foreign reserves as independent variables. The analysis utilizes the panel autoregressive distributed lag approach to examine both the long-run and short-run relationships between the dependent and independent variables. Moreover, the study employs the Panel Granger causality test to evaluate the causal connections among the selected variables. The results indicate that import demand, foreign debt, and remittance inflows positively affect the current account deficit in developing countries. Conversely, export demand, foreign direct investment, economic growth, and foreign reserves have a negative impact on the current account deficit. Consequently, it is recommended that developing countries prioritize the augmentation of stable and substantial foreign reserves as a strategy to alleviate the level of the current account deficit.

• Item Type: MPRA Paper
• Language: English
• Keywords: Capital inflow, current account deficit, economic growth, export demand, foreign reserves, import demand, foreign debt, foreign direct investment, foreign remittances
• Subjects: F - International Economics > F2 - International Factor Movements and International Business > F21 - International Investment ; Long-Term Capital Movements; F - International Economics > F2 - International Factor Movements and International Business > F24 - Remittances; F - International Economics > F3 - International Finance > F32 - Current Account Adjustment ; Short-Term Capital Movements; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F43 - Economic Growth of Open Economies; O - Economic Development, Innovation, Technological Change, and Growth > O2 - Development Planning and Policy > O24 - Trade Policy ; Factor Movement Policy ; Foreign Exchange Policy

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