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Int. J. Financial Stud. 2017, 5(1), 6; doi:10.3390/ijfs5010006

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

1
University College London, School of Slavonic and East European Studies, Gower St., Kings Cross, WC1E 6BT London, UK
2
USAID Governance for Inclusive Growth Program, TNR Building, 115 Tran Hung Dao St., Hoan Kiem Dist., 10000 Hanoi, Vietnam
*
Author to whom correspondence should be addressed.
Academic Editors: Zhibin Lin, Ling Xiao, Nirmala Lee, Chi Keung Lau and Satish Sharma
Received: 25 August 2016 / Revised: 14 January 2017 / Accepted: 17 January 2017 / Published: 14 February 2017
View Full-Text   |   Download PDF [258 KB, uploaded 14 February 2017]

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. View Full-Text
Keywords: FDI; GARCH; real exchange rate and price volatility; Latin America and the Caribbean FDI; GARCH; real exchange rate and price volatility; Latin America and the Caribbean
This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. (CC BY 4.0).

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Dal Bianco, S.; Loan, N.C.T. FDI Inflows, Price and Exchange Rate Volatility: New Empirical Evidence from Latin America. Int. J. Financial Stud. 2017, 5, 6.

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