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FDI, Exchange Rate, and Economic Growth in Hungary, 1995-2012: Causality and Cointegration Analysis

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  • Zsofia KOMUVES
  • Miguel D. RAMIREZ

Abstract

This paper investigates the causal relationship between FDI, GDP and the Euro/Hungarian Forint exchange rate in Hungary during the 1995-2012period. Although the question has great significance from an economic policy standpoint, there has been little to no empirical analysis undertaken so far in the case of transition economies such as Hungary. Utilizing unit root and cointegration analysis, this study finds a stable long-run relationship among the included variables, thus an error correction model is developed to capture the short-and long-run behavior of the variables. In the long run, changes in realGDP are positively associated with changes in the stock of FDI, while changes in the real effective exchange have a negative effect. In the short run, a 1 % deviation of FDI from its long-run relationship will be corrected by 0.48 % the following year. The VEC model leads to the general conclusion that all the variables in the system have a short-run adjustment mechanism. Finally, the Block Granger Causality tests generate mixed results with regard to the direction of causality among the variables, thus leadingto the conclusion that they are all endogenous.

Suggested Citation

  • Zsofia KOMUVES & Miguel D. RAMIREZ, 2014. "FDI, Exchange Rate, and Economic Growth in Hungary, 1995-2012: Causality and Cointegration Analysis," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 14(1), pages 45-58.
  • Handle: RePEc:eaa:aeinde:v:14:y:2014:i:1_4
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    References listed on IDEAS

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    1. Mileva, Elitza, 2008. "The impact of capital flows on domestic investment in transition economies," Working Paper Series 871, European Central Bank.
    2. Miguel D. Ramirez, 2010. "Economic and Institutional Determinants of FDI Flows to Latin America: A Panel Study," Working Papers 1003, Trinity College, Department of Economics.
    3. Anil Kumar, 2007. "Does foreign direct investment help emerging economies?," Economic Letter, Federal Reserve Bank of Dallas, vol. 2(jan).
    4. KH Zhang, 2001. "Does Foreign Direct Investment Promote Economic Growth? Evidence From East Asia And Latin America," Contemporary Economic Policy, Western Economic Association International, vol. 19(2), pages 175-185, April.
    5. Xiaohui Liu & Peter Burridge & P. J. N. Sinclair, 2002. "Relationships between economic growth, foreign direct investment and trade: evidence from China," Applied Economics, Taylor & Francis Journals, vol. 34(11), pages 1433-1440.
    6. Ramirez, Miguel D., 2006. "Is foreign direct investment beneficial for Mexico? An empirical analysis, 1960-2001," World Development, Elsevier, vol. 34(5), pages 802-817, May.
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    More about this item

    Keywords

    Granger causality test; error correction model (ECM); foreign direct investment (FDI); Johansen cointegration test; KPSS unit root test; vector error correction model (VECM); Zivot-Andrews single-break unit root test.;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

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