Exchange Rate Variability and Foreign Direct Investment: Consequences of EMU Enlargement
This paper analyzes theoretically and empirically the likely impact of the reduction in exchange rate uncertainty, due to European Monetary Union accession, on the intensity of foreign direct investment (FDI) inflow into candidate countries. Theoretical models give an ambiguous picture of how exchange rate uncertainty and volatility affect the direction and magnitude of such inflows. This paper finds that exchange rate uncertainty and volatility--and nominal exchange rate uncertainty in particular--may negatively influence the decision to locate investment in transition and accession countries. Euro adoption, on the other hand, is likely to positively influence FDI inflows in accession countries.
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Volume (Year): 44 (2006)
Issue (Month): 1 (February)
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