Current Account Imbalances and Foreign Investment: A Theoretical Analysis of Interrelationships and Causalities

This paper develops a unified structure to examine the interrelationships between current account, foreign investment, and domestic capital accumulation. In particular, we develop a two‐country, two‐period model with international mobility of both physical and financial capital, and endogenous domes...

Full description

Saved in:
Bibliographic Details
Published in:Review of international economics 2010-05, Vol.18 (2), p.369-381
Main Authors: Lahiri, Sajal, Mahbub Morshed, A. K. M.
Format: Article
Language:English
Subjects:
Capital accumulation
Current account
Current accounts
Economic models
Foreign investment
International monetary equilibrium
International monetary relations
Investment analysis
Investments abroad
Studies
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:This paper develops a unified structure to examine the interrelationships between current account, foreign investment, and domestic capital accumulation. In particular, we develop a two‐country, two‐period model with international mobility of both physical and financial capital, and endogenous domestic capital accumulation. We consider cases where (i) current account is endogenous, but foreign investments are exogenous, and (ii) current account is exogenous, but foreign investments are endogenous. For (i), we examine how inflow and outflow of foreign physical capital affects current account. For the second case, we examine how an increase in current account deficit affects foreign investments. The complementarity or substitutability of foreign capital and domestic capital turns out to be crucial to the relationship between current account deficit and foreign investment.
ISSN:0965-7576
1467-9396
DOI:10.1111/j.1467-9396.2010.00870.x