Interaction between capital flows and current account: A dynamic panel causality analysis of 19 emerging market economies for the period 1980 to 2009

We empirically examine the causal relation between current account and different types of foreign capital flows applying a dynamic panel causality approach, whic enables us to deal with the endogeneity between foreign capital flows and curren account. Our analysis based on 19 emerging market economies indicates that foreig direct investment and portfolio flows Granger-cause current account. This findin raises questions regarding the sustainability of current account deficits in emergin market economies, which rely on foreign capital inflows for financing the deficit.