Preprint Article Version 1 NOT YET PEER-REVIEWED

FDI Inflows, Price and Exchange Rate Volatility: New Empirical Evidence from Latin America

  1. Economics, London Metropolitan University, 84 Moorgate, London EC2M 6SQ, UK
  2. Program Manager, Trade Law & Economic Reform, USAID Governance for Inclusive Growth Program, Chemonics International Inc., Level 6, VID Building, 115 Tran Hung Dao St., Hoan Kiem Dist., Hanoi, Vietnam
Version 1 : Received: 25 August 2016 / Approved: 26 August 2016 / Online: 26 August 2016 (09:59:32 CEST)

How to cite: Dal Bianco, S.; Nguyen Cong To, L. FDI Inflows, Price and Exchange Rate Volatility: New Empirical Evidence from Latin America. Preprints 2016, 2016080212 (doi: 10.20944/preprints201608.0212.v1). Dal Bianco, S.; Nguyen Cong To, L. FDI Inflows, Price and Exchange Rate Volatility: New Empirical Evidence from Latin America. Preprints 2016, 2016080212 (doi: 10.20944/preprints201608.0212.v1).

Abstract

This paper investigates the impact of price and real exchange rate volatility on Foreign Direct Investment (FDI) inflows in a panel of 10 Latin American and Caribbean countries, observed between 1990 and 2012. Both price and exchange rate volatility series are estimated through the Generalized Autoregressive Conditional Heteroscedasticity model (GARCH). Our results, obtained employing the Fixed Effects estimator, confirm the theory of hysteresis and option value, in so far it is found a statistically significant negative effect of exchange rate volatility on FDI. Price volatility, instead, turns out to be positive but insignificant. Moreover, we show that human capital and trade openness are key for attracting foreign capital. From the policy perspective, our analysis suggests the importance of stabilization policies as well as the one of government credibility in promoting trade openness and human capital formation.

Subject Areas

FDI; GARCH; real exchange rate and price volatility; Latin America and the Caribbean

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