Dynamic Relationships between Exchange Rates and Foreign Direct Investment: Empirical Evidence from Korea

Asian Economic Journal, Vol. 29, No. 1, pp. 73-90. DOI: 10.1111/asej.12048

Posted: 15 Nov 2015 Last revised: 18 Dec 2017

See all articles by Jung Wan Lee

Jung Wan Lee

Boston University - Department of Administrative Sciences

Date Written: February 1, 2015

Abstract

This paper examines the short‐run and long‐run dynamic relationships between exchange rates and foreign direct investment (FDI) in Korea. Monthly data retrieved from the Bank of Korea from January 1999 to March 2012 are examined. A cointegration test, a vector error correction model, the Wald test and impulse responses techniques are applied to analyze the data. The present study finds that, first, long‐run causation between exchange rates and FDI flows exists, which implies that a change in exchange rates negatively affects FDI flows in the long run. Second, short‐run causation between exchange rates and FDI flows exists, which confirms that there is reciprocal feedback between the two variables. Finally, the study finds evidence of a structural break from the global financial crisis of 2007-2009 shock to FDI flows in Korea. An external shock affects changes in the endogenous variables and, thus, causes instability in the cointegrating vector in the system.

Keywords: cointegration, exchange rates, foreign direct investment, impulse

JEL Classification: F21, F31, G11, G18, O24

Suggested Citation

Lee, Jung Wan, Dynamic Relationships between Exchange Rates and Foreign Direct Investment: Empirical Evidence from Korea (February 1, 2015). Asian Economic Journal, Vol. 29, No. 1, pp. 73-90. DOI: 10.1111/asej.12048 . Available at SSRN: https://ssrn.com/abstract=2690418

Jung Wan Lee (Contact Author)

Boston University - Department of Administrative Sciences ( email )

808 Commonwealth Avenue
Boston, MA 02215
United States
617 358 5627 (Phone)
617 353 6840 (Fax)

HOME PAGE: http://www.bu.edu/met

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