Testing for causality between the foreign direct investment, current account deficit, GDP and total credit: Evidence from G7

In: Panoeconomicus: naučno-stručni časopis Saveza Ekonomista Vojvodine ; scientific-professional journal of Economists' Association of Vojvodina, Band 60, Heft 6, S. 791-812

Abstract

In this study, countries were analyzed between 1990 and 2011 in order to
determine whether a causal relationship exists among current account deficit,
GDP, foreign direct investment, and total credits of G7. Analysis took into
account the cross-sectional dependence and was applied to test the causality
among the variables form the panel. Firstly, panel unit root tests were used
for determining stationary of variables. As a result of the panel unit root
tests, it was found that GDP and foreign direct investment have a stationary
structure and that total credits and current account deficit contain unit
root. In order to see whether there is a long-term relationship among the
variables or not, the panel co-integration test was used. As a result of the
test, it was concluded that there is a co-integration relationship among the
series. The possibility of a causal relationship was analyzed among the
variables using the causality test developed by Elena Ivona Dumitrescu and
Christophe Hurlin (2012). Results of the analysis showed a unidirectional
causal relationship from current account deficit and foreign direct
investment to GDP. Bidirectional causality was found between current account
deficit and total credits. Finally, a unidirectional relationship was found
from foreign direct investment to current account deficit and total credits.