Causality and the structure of Canada's balance of payments: Evidence from time series

Abstract

Recent historical data on Canada's balance of payments reveals a persistent pattern of current account deficits and capital account surpluses. The theoretical interpretation and significance of this recurrent pattern are controversial issues among economists. The essence of this debate is, in our view, a disagreement of a more fundamental nature concerning the underlying causal relationship between the current and capital accounts. Three different causal viewpoints are identified and discussed. Then, an empirical investigation using both bivariate and multivariate time series analysis is conducted in order to help discriminate among the viewpoints. Our findings strongly suggest a feedback relation between the current and the long-term capital account indicating that unidirectional causal viewpoints are inconsistent with the Canadian experience.