Nominal and Real Volatility as Determinants of FDI
17 Pages Posted: 17 Feb 2011 Last revised: 25 Nov 2011
Date Written: November 25, 2011
Abstract
This paper examines the role of country-specific sources of output and interest rate or exchange rate volatility in driving FDI activities. Building on a dataset with bilateral FDI flows among 24 OECD economies over the period 1985-2007, we find that nominal and real volatility strongly deter foreign investments. Output and exchange rate volatility matter in particular for the decision whether to invest in a foreign country in the first place. Interest rate volatility mainly influences the amount of foreign investments.
Keywords: FDI, business cycle, output volatility, interest rate volatility, exchange rate volatility
JEL Classification: F21, E22, F42
Suggested Citation: Suggested Citation
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