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FDI, SECTORAL OUTPUT AND REAL EXCHANGE RATE DYNAMICS UNDER FINANCIAL OPENNESS
Author(s) -
Lartey Emmanuel K.K.
Publication year - 2017
Publication title -
bulletin of economic research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.227
H-Index - 29
eISSN - 1467-8586
pISSN - 0307-3378
DOI - 10.1111/boer.12075
Subject(s) - openness to experience , exchange rate , depreciation (economics) , economics , inflow , monetary economics , foreign direct investment , capital account , capital outflow , capital (architecture) , financial deepening , international economics , macroeconomics , capital formation , financial capital , human capital , market economy , psychology , social psychology , history , physics , archaeology , mechanics , financial intermediary
This paper adopts an alternative approach to the study of the impact of capital inflow on the real exchange rate by foremost, analysing the effect of FDI inflow on the ratio of tradables to nontradables, and then estimating the relationship between the tradable‐nontradable ratio and the real exchange rate, while accounting for the role of financial openness. Based on data for a group of developing countries, the findings show that an increase in FDI inflow is associated with a decrease in the tradable‐nontradable ratio, and that an increase in the tradable‐nontradable ratio leads to a depreciation of the real exchange rate; this effect being greater with an increase in financial openness. This suggests that an increase in FDI inflow could result in an expansion of the nontradable sector, which would be associated with a greater appreciation of the real exchange rate under a higher level of financial openness.