This paper examines the relationship between the current account (CA) and the
foreign direct investment (FDI) net inflow in the Southeast Europe (SEE)
countries. The panel data framework of five SEE countries for the period
2000- 2020 are used. Our research has three main findings. First, using the
vector autoregressive VAR(2) model, a long-run relationship between the CA
and the net FDI inflow is identified (a 1% increase in the net FDI inflow
leads to a 1.011% increase in the CA deficit). This suggests that FDI stock
will put upward pressure on the CA of the SEE countries in the long run.
Second, applying the panel VAR model Granger causality test, we found that
there is a two-way directional Granger causality. Third, our results from
the vector error correction (VEC) model suggest that about 26% of the
dynamics of the CA deficit adjusts to the long-run equilibrium path with the
net FDI inflow each year.