The Causality Relationship Between The Current Account And The Capital And Financial Account: Evidence From Middle East Region

Abstract

This study aims to test the causal relationship at the aggregate level between the current account and the capital and financial accountin a number of countries in the Middle East (Egypt, Turkey, Tunisia)during the period (1977- 2020), in addition to examining the causal relationship between the current account and the components of the capital and financial account represented in foreign direct investment, portfolio investment and other investments. Usingthe Causality Granger test based on the Unrestricted Vector
Autoregressive Model (VAR), the study found that there is a causal relationship that extends from the capital and financial account to the current account, specifically that causal relationship went from the other investments item to the current account.These results indicate the need for policies aimed at attracting and managing foreign capital to take into account working to rationalize borrowing and try to obtain opportunities for financing on concessional terms, and to work for a sound financial system in order to allocate the bulk of external financing to development projects that support productive capacity and increase exports with a view to reducing the deficit current account.