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Common currencies and FDI flows

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  • Stefano Schiavo

Abstract

The paper investigates the impact of EMU on foreign direct investment flows. Using the option value approach to investment decisions, it is possible to show that exchange rate uncertainty hinders cross-border investment flows. By permanently fixing bilateral exchange rates, a currency union can then be expected to spur international investment. Results from a gravity model on a sample of OECD countries confirm the hypothesis that currency unions have a positive impact on FDI; moreover, adopting the same currency appears to do more than merely eliminating exchange rate volatility. These findings closely resemble those recently obtained in the trade literature. Copyright 2007 , Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/oep/gpl036
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Bibliographic Info

Article provided by Oxford University Press in its journal Oxford Economic Papers.

Volume (Year): 59 (2007)
Issue (Month): 3 (July)
Pages: 536-560

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Handle: RePEc:oup:oxecpp:v:59:y:2007:i:3:p:536-560

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  1. Rose, Andrew K, 2003. "A Meta-Analysis of the Effect of Common Currencies on International Trade," CEPR Discussion Papers 4341, C.E.P.R. Discussion Papers.
  2. Richard Portes & Helene Rey, 1999. "The Determinants of Cross-Border Equity Flows," NBER Working Papers 7336, National Bureau of Economic Research, Inc.
  3. Rose, Andrew K & Engel, Charles, 2002. "Currency Unions and International Integration," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(4), pages 1067-89, November.
  4. Portes, Richard & Rey, Helene & Oh, Yonghyup, 2001. "Information and capital flows: The determinants of transactions in financial assets," European Economic Review, Elsevier, vol. 45(4-6), pages 783-796, May.
  5. Andrew K. Rose, 2000. "One money, one market: the effect of common currencies on trade," Economic Policy, CEPR & CES & MSH, vol. 15(30), pages 7-46, 04.
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Cited by:
  1. Andrew J. Abbott & Glauco De Vita, 2011. "Evidence on the impact of exchange rate regimes on bilateral FDI flows," Journal of Economic Studies, Emerald Group Publishing, vol. 38(3), pages 253-274, July.
  2. Matthias Busse & Carsten Hefeker & Signe Nelgen, 2010. "Foreign direct investment and exchange rate regimes," Volkswirtschaftliche Diskussionsbeiträge 141-10, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht.
  3. Sanja Samirana Pattnayak & Shandre M. Thangavelu, 2011. "Linkages and technology spillovers in the presence of foreign firms: Evidence from the Indian pharmaceutical industry," Journal of Economic Studies, Emerald Group Publishing, vol. 38(3), pages 275-286, July.
  4. Redoano, Michela, 2012. "Fiscal Interactions Among European Countries: Does the EU Matter?," CAGE Online Working Paper Series 101, Competitive Advantage in the Global Economy (CAGE).

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