Title: Exchange rate volatility and Foreign Direct Investment in South Asia

Authors: Kamal P. Upadhyaya; Rabindra Bhandari; Robert Rainish

Addresses: Department of Economics and Finance, University of New Haven, 300 Boston Post Road, West Haven, CT 06516, USA. ' Department of ABE&MIS, Westminster College, Fulton, MO 65251, USA. ' Department of Economics and Finance, University of New Haven, 300 Boston Post Road, West Haven, CT 06516, USA

Abstract: This paper examines the effect of Real Exchange Rate Volatility (RERVOL) on the Foreign Direct Investment (FDI) inflow in Bangladesh, India, Pakistan and Sri Lanka. A model that includes exchange rate volatility with other determinants of FDI is developed. Annual time series data from 1976–2009 is used for India, Pakistan and Sri Lanka. In case of Bangladesh because of the data limitation only data series from 1986–2009 is used. A panel data from these four countries for a period of 1986–2009 is also constructed. Before estimating the model the time series properties of the data are diagnosed and an error correction model is developed. The estimated results show an inconclusive relationship between the exchange rate volatility and the FDI.

Keywords: exchange rates; FDI; foreign direct investment; South Asia; panel data; real exchange rate volatility; Bangladesh; India; Pakistan; Sri Lanka; time series data; error correction; inconclusive relationships; economic policies; emerging economies; international development.

DOI: 10.1504/IJEPEE.2011.043310

International Journal of Economic Policy in Emerging Economies, 2011 Vol.4 No.4, pp.366 - 377

Available online: 24 Oct 2011 *

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