| In the recent years current account imbalances and the dramatic increase in capital flows in both advanced and emerging economies have become topical issues for policy debates as well as academia. Understanding to what extent capital flows cause reactions in the current account versus adjusting to changes in the current account has become more important.;This dissertation empirically examines the impact of capital flows (foreign direct investment and non-foreign direct investment) on current account and its counterparts (saving and investment) for two groups of countries, advanced and emerging market. In addition, with regards to the disaggregation of capital flows, an investigation of the direction of causality between the current account and foreign capital flows is presented. Generalized Method-of-Moments (GMM) dynamic panel data estimators and an ordinary fixed effect model of panel estimation for advanced and emerging economics are applied to examine the research questions over a 35-year period of 1980--2014. It is found that capital flows have different impacts on current account and its counterparts (domestic savings and investment). The relationships between components of capital flows and current account positions are based on a unidirectional causal relationship in both groups of countries. In emerging economies, capital flows cause current account imbalances, while in advanced economies, the relationship is the other way around. |
