Current Account Imbalances, Capital Accumulation, and Foreign Investment: A Theoretical Analysis of Interrelationships and Causalities By

This paper develops a unified structure to examine the interrelationships between current ac-count, foreign investment and domestic capital accumulation. In particular, we develop a two-country, two-period model with international mobility of both physical and financial capital, and endogenous domestic capital accumulation. We consider cases where (i) current account is endoge-nous, but foreign investments are exogenous, and (ii) current account is exogenous, but foreign investments are endogenous. For (i), we examine how inflow and outflow of foreign physical capital affects current account and domestic investments. For the second case, we examine how an increase in current account deficit affects foreign investments. JEL Classification: F2, F3, F4