Common currencies and FDI flows

Author: Schiavo, Stefano

Source: Oxford Economic Papers, Volume 59, Number 3, July 2007 , pp. 536-560(25)

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Abstract:

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 that 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.

Keywords: JEL classifications: F15; F21

Document Type: Research article

DOI: http://dx.doi.org/10.1093/oep/gpl036

Publication date: 2007-07-01

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Oxford Economic Papers is a general economics journal, publishing refereed papers in economic theory, applied economics, econometrics, economic development, economic history, and the history of economic thought. It occasionally publishes survey articles in addition to original papers. Books are not reviewed, but substantial review articles are considered. The journal occasionally publishes survey articles in addition to original papers, and occasionally publishes special issues or symposia.