Analyzing the Impact of Foreign Capital Inflows on the Current Account Balance in Developing Economies: A Panel Data Approach

Amjad Ali and Marc Audi

MPRA Paper from University Library of Munich, Germany

Abstract: This research has explored the effects of foreign capital inflows on the current account deficit in developing countries from 1995 to 2020. The study considers various factors such as import demand, export demand, foreign direct investment, foreign debt, economic growth, foreign remittances, and foreign reserves as independent variables. The analysis utilizes the panel autoregressive distributed lag approach to examine both the long-run and short-run relationships between the dependent and independent variables. Moreover, the study employs the Panel Granger causality test to evaluate the causal connections among the selected variables. The results indicate that import demand, foreign debt, and remittance inflows positively affect the current account deficit in developing countries. Conversely, export demand, foreign direct investment, economic growth, and foreign reserves have a negative impact on the current account deficit. Consequently, it is recommended that developing countries prioritize the augmentation of stable and substantial foreign reserves as a strategy to alleviate the level of the current account deficit.

Keywords: Capital inflow; current account deficit; economic growth; export demand; foreign reserves; import demand; foreign debt; foreign direct investment; foreign remittances (search for similar items in EconPapers)
JEL-codes: F21 F24 F32 F43 O24 (search for similar items in EconPapers)
Date: 2023-07
New Economics Papers: this item is included in nep-fdg, nep-int and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:118173

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