Relation between current account and financial account

Studies in the literature have shown that the factors affecting the current account and the adjustment in the current account imbalance differ between developed and developing countries. In this study, different causal relationship between current account and financial account was propesed by implementing Augmented VAR Model. The results of tests shows that, for developed countries, its mostly true that capital mobility is demand-induced and and the financial account functions to finance the current account imbalance. In contrast, for developing countries test results shows that financial account causes current account imbalances or there is a mixed relationship between current account and financial account. This divergant relationship between current account and financial account between developed and developing countries supports the ideas that in view of their limited absorptive capacity in dealing with capita l ? ows,countries without a sophisticated and sound ? nancial system should not abruptly remove their restrictions on capital mobility.