https://macropaperwarehouse.com/authors/lei-pan/Lei PanHugo -- gohugo.ioen-ushttps://macropaperwarehouse.com/papers/the-role-of-remittances-and-fdi-for-the-current-account-the-case-of-cambodia/https://macropaperwarehouse.com/papers/the-role-of-remittances-and-fdi-for-the-current-account-the-case-of-cambodia/<p>This paper builds and estimates a small open economy real-business-cycle (SOE-RBC) model for Cambodia augmented with two non-standard external-sector shocks — net unilateral transfers (remittances and government grants) and net foreign direct investment — in addition to the standard shocks of transitory productivity, permanent productivity, and world interest rate. Estimated on annual Cambodian data over 1993–2018 using Bayesian Markov Chain Monte Carlo, the model shows that FDI and unilateral transfers together account for approximately 50 percent of the variance in Cambodia&rsquo;s current account-to-output ratio (approximately 27 percent for FDI and 23 percent for unilateral transfers), substantially exceeding the combined contribution of productivity and world-interest-rate shocks. The estimated model tracks the observed current account path with a correlation of 0.93 and a measurement error of only 4.1 percent, compared to a measurement error of 58 percent and correlation of 0.80 when FDI and unilateral transfers are omitted. Applied to the COVID-19 scenario (1 percentage point drop in transitory productivity, 2 percentage point drop in the FDI-to-output ratio, and 8 percentage point drop in unilateral transfers-to-output), the model predicts the current account-to-output ratio will fall to approximately −14 percent in 2020, closely matching the World Bank&rsquo;s forecast of −14.1 percent.</p>