Common Currencies and FDI Flows

Stefano Schiavo
2005 Social Science Research Network  
The paper investigates the impact of currency unions 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. Empirical support is provided by means of a gravity model on a panel of 300 country-pairs followed for 22 years . Results confirm the
more » ... is 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.
doi:10.2139/ssrn.655821 fatcat:gzoln7bykbfkdmccmha2khczaa