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The long-run impact of monetary policy uncertainty and banking stability on inward FDI in EU countries

Author

Listed:
  • Claudiu Albulescu

    () (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers)

  • Adrian Ionescu

    () (LEO - Laboratoire d'économie d'Orleans - UO - Université d'Orléans - Université de Tours - CNRS - Centre National de la Recherche Scientifique)

Abstract

In the present paper, we assess the long-run relationship between FDI inflows and the financial environment in 16 EU countries. For this purpose, we use a cointegration technique for heterogeneous panels and the FMOLS and DOLS estimators, over the period 2001 to 2015. We show that financial conditions are important for FDI inflows. More precisely, the monetary uncertainty, calculated as the difference between the recorded and the forecasted interest rate values, negatively affects the FDI inflows. In addition, the banking stability, measured through different Z-score specifications, positively influences the foreign investment. However, this result is influenced by the way the Z-score is calculated. We further report a positive relationship between the business cycle and the FDI entrance. The robustness analyses based on alternative specifications of monetary uncertainty and banking stability confirm our findings. These results are also supported by a PMG estimation. Therefore, authorities must pay special attention to monetary policy predictability and to banking stability in order to facilitate the investors' access to finance and their investment decision.

Suggested Citation

  • Claudiu Albulescu & Adrian Ionescu, 2017. "The long-run impact of monetary policy uncertainty and banking stability on inward FDI in EU countries," Working Papers hal-01503950, HAL.
  • Handle: RePEc:hal:wpaper:hal-01503950
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-01503950
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    Keywords

    cointegration; EU countries; FDI inflows; monetary uncertainty; banking stability; Z-score;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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