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Vertical FDI and exchange rates over the business cycle: The welfare implications of openness to FDI

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  • Shi, Jiao

Abstract

It has long been observed that a country tends to receive increased net foreign direct investment (FDI) inflow when its currency depreciates. We build an open-economy macroeconomic model that accounts for the positive correlation, and re-examine the welfare implications of FDI, focusing mainly on the short run. We show that short-run FDI fluctuations exacerbate utility loss over business cycles in an environment with monetary shocks, but have little impact on welfare over business cycles caused by productivity shocks. The best outcome occurs when the economy retains long-run FDI, but restricts short-run movements in the production location of firms.

Suggested Citation

  • Shi, Jiao, 2019. "Vertical FDI and exchange rates over the business cycle: The welfare implications of openness to FDI," Journal of Development Economics, Elsevier, vol. 138(C), pages 274-293.
    • Handle: RePEc:eee:deveco:v:138:y:2019:i:c:p:274-293
    DOI: 10.1016/j.jdeveco.2019.01.004
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    Cited by:

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    2. Liu, S. & Xiao, Q., 2021. "An empirical analysis on spatial correlation investigation of industrial carbon emissions using SNA-ICE model," Energy, Elsevier, vol. 224(C).
    3. Ranti Darwin & Dyah Wulan Sari & Unggul Heriqbaldi, 2022. "Dynamic Linkages between Energy Consumption, Foreign Direct Investment, and Economic Growth: A New Insight from Developing Countries in Asia," International Journal of Energy Economics and Policy, Econjournals, vol. 12(6), pages 30-36, November.

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    More about this item

    Keywords

    Foreign direct investment; Exchange rates; Gains from openness;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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