FDI, Exchange Rate, and Economic Growth in Hungary, 1995-2012: Causality and Cointegration Analysis

Zsofia Komuves and Miguel Ramirez

Applied Econometrics and International Development, 2014, vol. 14, issue 1, 45-58

Abstract: This paper investigates the causal relationship between FDI, GDP and the Euro/Hungarian Forint exchange rate in Hungary during the 1995-2012period. Although the question has great significance from an economic policy standpoint, there has been little to no empirical analysis undertaken so far in the case of transition economies such as Hungary. Utilizing unit root and cointegration analysis, this study finds a stable long-run relationship among the included variables, thus an error correction model is developed to capture the short-and long-run behavior of the variables. In the long run, changes in realGDP are positively associated with changes in the stock of FDI, while changes in the real effective exchange have a negative effect. In the short run, a 1 % deviation of FDI from its long-run relationship will be corrected by 0.48 % the following year. The VEC model leads to the general conclusion that all the variables in the system have a short-run adjustment mechanism. Finally, the Block Granger Causality tests generate mixed results with regard to the direction of causality among the variables, thus leadingto the conclusion that they are all endogenous.

Keywords: Granger causality test; error correction model (ECM); foreign direct investment (FDI); Johansen cointegration test; KPSS unit root test; vector error correction model (VECM); Zivot-Andrews single-break unit root test. (search for similar items in EconPapers)
JEL-codes: C22 F21 O52 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (1)

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Working Paper: FDI, Exchange Rate, and Economic Growth in Hungary, 1995-2012: Causality and Cointegration Analysis (2013)
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