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Endogenous Flows of Foreign Direct Investment and International Real Business Cycles

  • Nicolas Petrosky-Nadeau

This paper models flows of foreign direct investment (FDI) in a two country, two sector DSGE framework. The allocation of capital to production capacity abroad is subject to a search-and-matching friction with endogenous capital reallocation. The model is calibrated on observed inflows and outflows of FDI and leads to dynamics of foreign direct investment consistent with the empirical evidence documented in this paper: relative to domestic investment, FDI is more volatile, and inward and outward flows of FDI are positively correlated. This contrasts with a standard International Real Business Cycle model which predicts a negative correlation and low volatility. More- over, the model generates cross-country aggregate investment correlations consistent with the data.

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File URL: http://www.andrew.cmu.edu/user/npn/FDI_and_BCs_2011.pdf
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Paper provided by Carnegie Mellon University, Tepper School of Business in its series GSIA Working Papers with number 2011-E16.

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Handle: RePEc:cmu:gsiawp:-720614274
Contact details of provider: Postal: Tepper School of Business, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213-3890
Web page: http://www.tepper.cmu.edu/

Order Information: Web: http://student-3k.tepper.cmu.edu/gsiadoc/GSIA_WP.asp

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