The Causal Relationship between Current Account and Financial Account Balance in Selected CEE Countries

Abstract

This paper first examines the causal relationship between the current account and financial account then the current account and the main components of financial account and finally the financial account, saving, and investment in Croatia, Hungary, Poland, Romania and Slovenia. In this context we employ Toda-Yamamoto approach to Granger causality test by using the quarterly data. We find a causal relation running from the financial (current) account to the current (financial) account in Croatia (Poland) and Slovenia (Romania) while a bi-directional causality exists in the case of Hungary. We conclude that at least one component of financial account balance Granger causes current account in Croatia, Poland, Romania and Slovenia while the causality running from the current account to at least one component of financial account in Poland, Romania and Hungary. It seems that the financial account Granger causes the saving in Hungary and investment in Croatia while the causality running from the saving in Romania and investment in both Croatia and Poland to the financial account.