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

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  • Murai Taiki

    (9180 Leipzig University , Grimmaische Straße 12, D-04109 Leipzig, Germany)

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.

Suggested Citation

  • Murai Taiki, 2024. "The Relationship Between the German Current Account and Financial Account: Evidence from the Toda-Yamamoto Causality Approach," The Economists' Voice, De Gruyter, vol. 21(1), pages 65-96.
    • Handle: RePEc:bpj:evoice:v:21:y:2024:i:1:p:65-96:n:1011
    DOI: 10.1515/ev-2024-0023
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    More about this item

    Keywords

    current account; financial account; Toda-Yamamoto causality test; gross capital flows; net capital flows;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F30 - International Economics - - International Finance - - - General
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics

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