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

Dal Bianco, Silvia; Loan, Nguyen; (2017) FDI Inflows, Price and Exchange Rate Volatility: New Empirical Evidence from Latin America. International Journal of Financial Studies , 5 (1) , Article 6. 10.3390/ijfs5010006. Green open access

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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 as a statistically significant negative effect of exchange rate volatility on FDI is found. 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 policy of government credibility in promoting trade openness and human capital formation.

Type: Article
Title: FDI Inflows, Price and Exchange Rate Volatility: New Empirical Evidence from Latin America
Open access status: An open access version is available from UCL Discovery
DOI: 10.3390/ijfs5010006
Publisher version: https://doi.org/10.3390/ijfs5010006
Language: English
Additional information: This is an Open Access article distributed under the terms of the Creative Commons Attribution Licence (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
Keywords: FDI; GARCH; real exchange rate and price volatility; Latin America and the Caribbean
UCL classification: UCL
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/10160630
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