2005/07 | LEM Working Paper Series | |
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Common Currencies and FDI Flows |
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Stefano Schiavo |
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Keywords | ||
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EMU, Currency Union, FDI, Uncertainty, Investment.
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JEL Classifications | ||
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F15, F21.
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Abstract | ||
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The paper investigates the impact of EMU on foreign direct investment flows. Using
the option value approach to investment decisions, it is possible to show how exchange rate
uncertainty hinders cross-border investment flows. By permanently fixing bilateral exchange
rates, a currency union can then be expected to spur international investment. Results
from a gravity model on a sample of OECD countries confirm the hypothesis that currency
unions have a positive impact on FDI; moreover, adopting the same currency appears to do
more than merely eliminating exchange rate volatility. These findings closely resemble those
recently obtained in the trade literature.
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