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Current Account Imbalances and Foreign Investment: A Theoretical Analysis of Interrelationships and Causalities
Author(s) -
Lahiri Sajal,
Mahbub Morshed A. K. M.
Publication year - 2010
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/j.1467-9396.2010.00870.x
Subject(s) - current account , economics , capital outflow , foreign direct investment , complementarity (molecular biology) , capital (architecture) , monetary economics , physical capital , international economics , capital account , capital deepening , investment (military) , macroeconomics , foreign capital , financial capital , capital formation , exchange rate , market economy , human capital , history , biology , politics , law , political science , genetics , archaeology
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.