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The Effect of Inflation Targeting on Foreign Direct Investment Flows to Developing Countries

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  • Iuliia Vasileva

    (Lafayette College)

Abstract

Due to the many benefits that come with foreign direct investment (FDI), such as greater economic growth and technology spillovers, developing countries strive to attract this type of investment. Although the amount of FDI in developing countries has increased greatly over the past several years, not all developing countries have been successful at attracting it. A credible monetary policy, such as inflation targeting (IT), might make countries that implement it more attractive destinations for FDI flows due to the reliable macroeconomic environment created. This paper estimates the effect of IT on FDI flows to developing countries using a difference-in-differences approach and panel data for 71 countries for the period 1985 to 2013. This paper also looks at the difference between targeting and non-targeting countries in terms of FDI inflows during times of high instability. The results indicate that the adoption of IT leads to increased FDI flows to developing countries overall and, most importantly, during times of distress.

Suggested Citation

  • Iuliia Vasileva, 2018. "The Effect of Inflation Targeting on Foreign Direct Investment Flows to Developing Countries," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 46(4), pages 459-470, December.
    • Handle: RePEc:kap:atlecj:v:46:y:2018:i:4:d:10.1007_s11293-018-9594-6
    DOI: 10.1007/s11293-018-9594-6
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    2. Valery V. Bezpalov & Sergey A. Lochan & Dmitry V. Fedyunin & Irina V. Polozhentseva & Tatiana V. Gorina, 2022. "Relationship between Complex Integration Indices and Inflation Indicators and Their Impact on the Development of Regional Cooperation between Countries to Reduce the Level of Inflationary Risks: Case ," Risks, MDPI, vol. 11(1), pages 1-26, December.
    3. Mishra, Akanksha & Dubey, Amlendu, 2022. "Inflation targeting and its spillover effects on financial stability in emerging market economies," Journal of Policy Modeling, Elsevier, vol. 44(6), pages 1198-1218.
    4. Bruno Pires Tiberto & Helder Ferreira de Mendonça, 2023. "Effects of Sustainable Monetary and Fiscal Policy on FDI Inflows to EMDE Countries," Working Papers Series 575, Central Bank of Brazil, Research Department.
    5. Mbassi, Christophe Martial & Samba, Cyrille Michel & Elomo Zogo, Thérèse, 2025. "Does monetary policy fuel energy consumption across the world? Focus on inflation targeting," Energy Economics, Elsevier, vol. 145(C).
    6. de Mendonça, Helder Ferreira & Tiberto, Bruno Pires, 2024. "Are prudent monetary and fiscal policy drivers of FDI inflows?," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 5(1).

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