Common Currencies and FDI Flows

Schiavo, Stefano

doi:10.2139/ssrn.655821

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Common Currencies and FDI Flows

LEM Working Paper Series No. 2005/07

32 Pages Posted: 8 Feb 2005

See all articles by Stefano Schiavo

Stefano Schiavo

University of Trento - Department of Economics and Management; OFCE

There are 2 versions of this paper

Date Written: April 2005

Abstract

The paper investigates the impact of EMU on foreign direct investment flows. Using the option value approach to investment decisions, it is possible to show how exchange rate uncertainty hinders cross-border investment flows. By permanently fixing bilateral exchange rates, a currency union can then be expected to spur international investment. Results from a gravity model on a sample of OECD countries confirm the hypothesis that currency unions have a positive impact on FDI; moreover, adopting the same currency appears to do more than merely eliminating exchange rate volatility. These findings closely resemble those recently obtained in the trade literature.

Keywords: EMU, currency union, FDI, uncertainty, investment

JEL Classification: F15, F21

Suggested Citation: Suggested Citation

Schiavo, Stefano, Common Currencies and FDI Flows (April 2005). LEM Working Paper Series No. 2005/07, Available at SSRN: https://ssrn.com/abstract=655821 or http://dx.doi.org/10.2139/ssrn.655821