Current and capital account interdependence: An empirical test

The interrelation between the current and capital accounts of the balance of payments is widely recognised in the literature, but the nature of that interdependence is not well understood. This study uses two empirical specifications to test the interdependence between the current and capital accounts of the balance of payments. The alternative specifications, derived from the balance of payments constraint and from national income accounting relationships, respectively, yield consistent support for the interdependence hypothesis. The balance of payments specification returns positive findings for nine of the ten sample countries. These are corroborated by the general equilibrium specification in three instances. The relatively weak support obtained from the general equilibrium specification may be attributable to the rudimentary nature of that specification, in particular to the failure to model the lag structure of the underlying model.