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

13 Pages Posted: 12 Apr 2010

See all articles by Sajal Lahiri

Sajal Lahiri

Southern Illinois University Carbondale - Department of Economics

A. K. M. Mahbub Morshed

affiliation not provided to SSRN

Abstract

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.

Suggested Citation

Lahiri, Sajal and Mahbub Morshed, A. K. M., Current Account Imbalances and Foreign Investment: A Theoretical Analysis of Interrelationships and Causalities. Review of International Economics, Vol. 18, No. 2, pp. 369-381, May 2010. Available at SSRN: https://ssrn.com/abstract=1587140 or http://dx.doi.org/10.1111/j.1467-9396.2010.00870.x

Sajal Lahiri (Contact Author)

Southern Illinois University Carbondale - Department of Economics ( email )

MC 415
1000 Faner Drive
Carbondale, IL 62901
United States

A. K. M. Mahbub Morshed

affiliation not provided to SSRN

No Address Available

Register to save articles to
your library

Register

Paper statistics

Downloads
3
Abstract Views
491
PlumX Metrics