Do capital inflows cause current account deficits?

This article examines the causal relationship between the Current Account (CA) and the Capital Account (KA) for Korea in a multivariate framework. The estimation results indicate the existence of bidirectional causality between the KA and the CA. The findings imply that an inflow of capital causes an appreciation of the Exchange Rate (ER), which in turn worsens the CA balance and may even trigger a currency crisis in the absence of adequately supervised banking systems and ER flexibility.