Discrepancies in Current Account Balances and Flows of Foreign Capital: A Causal Investigation from Developing Asian Economies

With growing financial liberalization, the twin challenges of rising current account (CA) deficits and volatile capital flows have become a key concern for policymakers in recent years. This study empirically investigates the causal dynamics between the capital account (KA) and the CA in major emerging Asian economies over the period 1980–2024, employing a panel Granger causality framework. The overall findings reveal no significant causal relationship between the KA and the CA at the aggregate level. However, a deeper analysis disaggregating the KA into its key components, such as foreign direct investment and foreign portfolio investment, yields different results. By incorporating the real effective exchange rate as a transmission channel, the study uncovers evidence of unidirectional causality running from non-debt-creating capital flows to the CA. This suggests that disaggregating capital flows allows for clearer identification of which types exert the most influence on the CA. Furthermore, the findings indicate that capital flow volatility tends to deteriorate the CA balance, underscoring the need for policymakers to prioritize financial sector stability, particularly before transitioning toward full KA convertibility.

JEL Classification: C32, C33, F21, F31, F32