The Role of Remittances and FDI for the Current Account: The Case of Cambodia

Abstract This paper develops a small open economy real‐business‐cycle model to examine the dynamics of Cambodian current account. Differing from previous studies, our model incorporates both net foreign direct investment (FDI) and remittances as additional sources of macro‐economic fluctuations. Our results reveal that these two factors, especially FDI, account for more than 50% of the variations in the current account. In addtion, the model mimics well the actual trajectory of the Cambodia's current account, suggesting that the nature of the discount factor—whether endogenous or exogenous— does not play a crucial role in explaining the external balances.