The Relationship Between the German Current Account and Financial Account: Evidence from the Toda-Yamamoto Causality Approach

Murai Taiki ()
Additional contact information
Murai Taiki: 9180 Leipzig University , Grimmaische Straße 12, D-04109 Leipzig, Germany

The Economists' Voice, 2024, vol. 21, issue 1, 65-96

Abstract: The paper examines the causality between the German current account and financial account. It contrasts with past research which assumes the current account and financial account to be jointly determined by a saving-investment imbalance. Our analysis decomposes the current account into exports and imports (real resource flows) and the financial account into domestic capital outflows and foreign capital inflows (gross capital flows). Evidence from the Toda-Yamamoto causality test shows that for Germany from Q1.1980 to Q2.2023, the causality runs from the financial account to the current account. It is not real resource flows but gross capital flows which exert significant impacts on the German real exchange rate. The finding implies that over the long run, strong German capital outflows and weak foreign capital inflows contributed to weak wage growth and stagnant investment in Germany, sustaining the persistent German current account surpluses. A reduction of the German current account surpluses requires a policy mix of fiscal expansion and monetary tightening which would expand the absorption of German and foreign capital in the German economy.

Keywords: current account; financial account; Toda-Yamamoto causality test; gross capital flows; net capital flows (search for similar items in EconPapers)
JEL-codes: C01 F21 F30 F32 F4 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1515/ev-2024-0023 (text/html)
For access to full text, subscription to the journal or payment for the individual article is required.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bpj:evoice:v:21:y:2024:i:1:p:65-96:n:1011

Ordering information: This journal article can be ordered from
https://www.degruyter.com/journal/key/ev/html

DOI: 10.1515/ev-2024-0023

Access Statistics for this article

The Economists' Voice is currently edited by Michael Cragg, Dwight Jaffee and Joseph Stiglitz

More articles in The Economists' Voice from De Gruyter
Bibliographic data for series maintained by Peter Golla ().