Third‐country exchange rate effects on foreign direct investment flows: A global vector autoregessive approach

Todd Sarnstrom and Michael Ryan

Review of International Economics, 2023, vol. 31, issue 2, 522-549

Abstract: We employ global vector autoregessive estimation to examine bilateral and third‐country exchange rate effects on U.S. FDI outflows. Our bilateral results mimic previous work on the topic and indicate host currency depreciation decreases FDI inflows. However, in contrast, third‐country exchange rates also decrease U.S. FDI outflows to those hosts. We find these exchange rate impacts are short‐lived and small relative to quarterly average U.S. outflows. This suggests a potential explanation for the mixed results in the exchange rate FDI literature; while exchange rates may have significant statistical impact on U.S. FDI outflows, typically they are not economically significant.

Date: 2023
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