Empirical Economics

, Volume 56, Issue 2, pp 523–549 | Cite as

Fiscal stance, foreign capital inflows and the behavior of current account in the Asian countries

  • Ahmad Zubaidi BaharumshahEmail author
  • Siew-Voon Soon
  • Mark E. Wohar


This paper investigates the causality relationship between budget and current account deficits for 14 Asian countries. The major findings based on bootstrap Granger causality tests in heterogenous mixed panels are: First, investments (and foreign capital inflows) have a notable impact on the current account prior to the Asian financial crisis of 1997–1998. Second, we detect direct causality between the budget and the current account imbalances before but not after the crisis. The data suggest that the current account targeting hypothesis, that is, the reverse causality, prevails after the crisis. Third, budget deficits have a significant influence on both investment and foreign capital inflows in the second period. Fourth, Asian countries are less susceptible to the influence of FDI inflows in the aftermath of the crisis. Finally, structural break turns out crucial in assessing the causal patterns of the twin deficits nexus in the Asian countries.


Global imbalances Twin deficit hypothesis FDI Crisis Asian 

JEL Classification

F41 F32 C10 



The authors are grateful to the Editor, Prof. B. Candelon and an anonymous referee for insightful suggestions and comments that result in a substantial improvement of this paper. All errors and omissions remain ours. The first authors gratefully acknowledge the financial support from Universiti Putra Malaysia (Grant No: GB-IPB/2014/ 9440900).


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Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2017

Authors and Affiliations

  • Ahmad Zubaidi Baharumshah
    • 1
    Email author
  • Siew-Voon Soon
    • 1
  • Mark E. Wohar
    • 2
    • 3
  1. 1.Department of Economics, Faculty of Economics and ManagementUniversiti Putra MalaysiaSerdangMalaysia
  2. 2.College of Business AdministrationUniversity of Nebraska at OmahaOmahaUSA
  3. 3.School of Business and EconomicsLoughborough UniversityLeicestershireUK

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