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Bilateral De-Jure Exchange Rate Regimes and Foreign Direct Investment: A Gravity Analysis

Author

Listed:
  • Philipp Harms

    () (Johannes Gutenberg-University)

  • Jakub Knaze

    () (Johannes Gutenberg-University)

Abstract

This paper uses a newly constructed dataset on bilateral de-jure exchange rate regimes to estimate the effect of expected exchange rate volatility on foreign direct investment (FDI). The new dataset accounts for the fact that officially pegging to one currency is uninfor- mative about the exchange rate regime prevailing vis-à-vis other currencies, and it allows characterizing bilateral exchange rate regimes based on countries' ex-ante announcements rather than ex-post observations. We present a simple model that suggests that announced exchange rate stability enhances bilateral FDI ows. The empirical evidence we provide o ers some support to this claim: countries that are linked by a non- oating exchange rate regime seem to attract significantly more FDI from each other. In particular, rela- tionships with no separate legal tender like currency unions are most favorable to FDI in both developed and developing countries. Moreover, we find substantial differences between developing and developed countries, with the effect of announced exchange rate stability being much stronger for the former group than for the latter.

Suggested Citation

  • Philipp Harms & Jakub Knaze, 2018. "Bilateral De-Jure Exchange Rate Regimes and Foreign Direct Investment: A Gravity Analysis," Working Papers 1808, Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz.
  • Handle: RePEc:jgu:wpaper:1808
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    References listed on IDEAS

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    Cited by:

    1. Hou, Jia & Knaze, Jakub, 2019. "The Effect of Exchange Rate Regimes on Business Cycle Synchronization: A Robust Analysis," MPRA Paper 95182, University Library of Munich, Germany.

    More about this item

    Keywords

    Exchange rate regimes; Foreign direct investment; Gravity equation;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy

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