Exchange Rate Strategies in the Competition for Attracting FDI

Agnès Bénassy-Quéré (), Lionel Fontagné () and Lahreche-Revil, A.

Papiers d'Economie Mathématique et Applications from Université Panthéon-Sorbonne (Paris 1)

Abstract: Building on the needs for long term capital inflows in developing countries, this paper reconsiders the choice of an exchange-rate regime by integrating the determinants of multinational firms locations. The trade-off between price competitiveness and a stable nominal exchange rate is modeled. It is shown that exchange rate volatility is detrimental to foreign direct investment and that its impact compares with misalignments. The main result is that the building of currency blocks could be a way of increasing FDI to emerging countries as a whole. The frontiers of monetary areas would then be strongly influenced by geography, as FDI is.

Keywords: FOREIGN INVESTMENTS; EXCHANGE RATE; MONETARY POLICY (search for similar items in EconPapers)
JEL-codes: F21 F23 F31 F33 (search for similar items in EconPapers)
Date: 2000

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Working Paper: Exchange rate strategies in the competition for attracting FDI (1999)
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Persistent link: http://EconPapers.repec.org/RePEc:fth:pariem:2000.07

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