6533b82efe1ef96bd12929dc

RESEARCH PRODUCT

Bilateral De-Jure Exchange Rate Regimes and Foreign Direct Investment: A Gravity Analysis

Jakub KnazePhilipp Harms

subject

Economics and Econometrics050208 finance05 social sciencesDeveloping countryForeign direct investmentMonetary economicsExchange-rate regimeO24Exchange rateCurrencyExchange rate volatility0502 economics and businessEconomicsddc:330F21F23050207 economicsEmpirical evidenceGravity equationLegal tenderForeign direct investmentFinanceExchange rate regimes

description

Abstract This paper introduces a novel dataset on bilateral de-jure exchange rate regimes. The new dataset accounts for the fact that officially pegging to one currency is uninformative about the exchange rate regime prevailing vis-a-vis other currencies, and it allows characterizing bilateral exchange rate regimes based on countries’ ex-ante announcements rather than ex-post observations. We use this data to estimate the effect of expected exchange rate volatility on foreign direct investment (FDI). Starting from a simple model that suggests that announced exchange rate stability enhances bilateral FDI flows, we provide empirical evidence that lends support to this claim: countries that are linked by a non-floating exchange rate regime seem to attract significantly more FDI from each other. In particular, relationships with no separate legal tender like currency unions are most favorable to FDI in both developed and developing countries. Moreover, we find substantial differences between developing and developed countries, with the effect of announced exchange rate stability being much stronger for the former group than for the latter.

yearjournalcountryeditionlanguage
2021-10-01
https://hdl.handle.net/10419/181559