Causality Relationships in the Structure of Portugal’s Balance of International Payments
Anastasios Mastroyiannis

Abstract
This paper provides an empirical investigation of the causal relationship between the current account and foreign capital inflows in the case of the Portuguese economy, during the period 1980-2009. We utilize unit root and cointegration analysis to test for the existence of a long run relationship. Furthermore, we examine the type of Granger-causality among the two variables on the basis of an augmented VAR model. Our findings suggest that there exists a long run relationship between foreign capital inflows and current account position that is based upon a unidirectional causal long-run relationship, running from foreign capital inflows to current account position. In the short-run we find a bidirectional relationship between the two variables. The results indicate that policies design for attracting foreign capital should take into account their current account deficit inducing implications and that policies aiming to improve the management of foreign capital inflows have a role in addressing indebtedness and external imbalances concerns.

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