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Is the relationship between FDI and inflation nonlinear and asymmetric? new evidence from NARDL approach

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  • Hossain, Saddam
  • Masih, Mansur

Abstract

The relationship between an FDI and inflation has been addressed in the literature. But they were based on linear and symmetric assumptions and the results are conflicting. We apply both ARDL and nonlinear ARDL which can test nonlinearity and asymmetric relationship between them. We use Bangladesh as a case study. The findings tend to indicate that there is a nonlinear cointegration between the FDI and inflation and that the relationship is symmetric in the short run but asymmetric in the long run. This is a very important finding for policy purposes. Moreover, the causality analysis tends to indicate that the FDI is the most exogenous (independent) variable and inflation is the most endogenous (dependent) variable. That implies that the FDI is determined externally and then it drives other variables such as, the trade openness, GDP, exchange rate and finally inflation. Hence the Government can use this Granger-causal chain to affect inflation through the monetary, fiscal and exchange rate policies.

Suggested Citation

  • Hossain, Saddam & Masih, Mansur, 2018. "Is the relationship between FDI and inflation nonlinear and asymmetric? new evidence from NARDL approach," MPRA Paper 112549, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:112549
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    References listed on IDEAS

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    More about this item

    Keywords

    Inflation; FDI; Asymmetry; ARDL; NARDL; VDC;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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