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

Philipp Harms and Jakub Knaze ()

No 1808, Working Papers from Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz

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.

Keywords: Exchange rate regimes; Foreign direct investment; Gravity equation (search for similar items in EconPapers)
JEL-codes: F21 F23 O24 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-int
Date: 2018-08-24
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https://download.uni-mainz.de/RePEc/pdf/Discussion_Paper_1808.pdf First version, 2018 (application/pdf)

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