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Causal relationships between the capital account and the current account: an empirical investigation from India

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  • Bhavesh Garg
  • K. P. Prabheesh

Abstract

This article provides an empirical investigation of the causal relationship between the current account ( CA ) and the capital account ( KA ) in the case of Indian economy. The results indicate the nonexistence of causal relationship between the CA and the KA . Furthermore, we examine the causal relations between the components of the KA and the CA along with exchange rate as the linking factor between them. The causal findings, in the above mentioned case, show different results. Our finding suggests that there exist a causal relationship from Nondebt flows to the CA via the real effective exchange rate. This implies that decomposition of the KA helps in identifying the source of flows that drives the CA the most. The results also indicate that volatile capital flows may deteriorate the CA balance and therefore, emphasis should be laid on improving the soundness of the financial sector before moving towards the full KA convertibility.

Suggested Citation

  • Bhavesh Garg & K. P. Prabheesh, 2015. "Causal relationships between the capital account and the current account: an empirical investigation from India," Applied Economics Letters, Taylor & Francis Journals, vol. 22(6), pages 446-450, April.
    • Handle: RePEc:taf:apeclt:v:22:y:2015:i:6:p:446-450
    DOI: 10.1080/13504851.2014.948669
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    Cited by:

    1. Garg, Bhavesh & Prabheesh, K.P., 2021. "Testing the intertemporal sustainability of current account in the presence of endogenous structural breaks: Evidence from the top deficit countries," Economic Modelling, Elsevier, vol. 97(C), pages 365-379.
    2. Ashima Goyal & Vaishnavi Sharma, 2019. "Estimating the Relationship Between the Current Account, the Capital Account and Investment for India," Foreign Trade Review, , vol. 54(1), pages 29-45, February.
    3. Özcan Karahan & Olcay Çolak, 2020. "An Examination Of The Causality Relationship Between Current And Financial Accounts In Turkey," Economic Annals, Faculty of Economics and Business, University of Belgrade, vol. 65(224), pages 7-28, January –.
    4. Oeking, Anne & Zwick, Lina, 2015. "On the relation between capital flows and the current account," Ruhr Economic Papers 565, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    5. A.Yasemin YALTA & Bahar BAYRAKTAR-SAGLAM, 2016. "Interaction Between Capital Flows And Current Account: A Dynamic Panel Causality Analysis Of 19 Emerging Market Economies For The Period 1980 To 2009," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 16(2), pages 25-32.
    6. Tanveer Ahmad Khan, 2022. "Current and Capital Account Dynamics in India: An Empirical Analysis of the Post-Reform Period," Foreign Trade Review, , vol. 57(1), pages 41-65, February.

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