Complexity of Forex Interconectivity with Macrofinancial

Topics: Economics, Investment, Macroeconomics Pages: 34 (5831 words) Published: May 15, 2013
Abstract. This paper focuses on the correlation between foreign exchange rate and a series of variables related to macro- financial economy at the level of the CEE countries. In the view of the financial crisis that brought forth a reaction of risk aversion among investors towards the emerging countries, it is question- nable if foreign direct investments under the impact of the exchange rate dynamic are still playing a positive role in the catching up process. We develop an econo- metric approach based on the VECM methodology that conducts to the impulse-response functions highlighting the interactions between financial and real economy, with a special emphasis on the contributions of foreign direct investments on the dynamic of the variables that capture the state of the macroeconomic envi- ronment. The research concludes that foreign direct investments act as a catalyst for the economic growth, enabling the real economy to react positively to the impulses of the financial flows.


UniversityforFinanceandBanking, Bucharest, Romania
3, Negru Vodă, 3rd district, Bucharest, Romania

Management & Marketing
Challenges for the Knowledge Society
(2011) Vol. 6, No. 4, pp. 591-604

Keywords: FDI, exchange rate, market capitalization, economic growth, financial markets.

Management & Marketing

1. Introduction

Foreign Direct Investments (FDI) have recorded a consistent upward trend during the last 15 years in the CEE countries. Since financial inflows have been considered as supportive to macroeconomic stabilization, countries have resorted to various measures that aimed to render themselves more attractive in the eyes of foreign investors. The system of measures included the elimination of restrictions, the privatization of state-owned companies and the reduction of fiscal pressures as well as consistent subsidies. Meanwhile, the foreign direct investments generated important positive effects from the perspective of the employment increase and the extension of the range of products and services. Due to the propagation in chain of positive effects triggered by the foreign direct investments, there is a consistent literature on this topic; a special emphasis has been placed on the determinant factors that encourage the increase of foreign direct investments (Tomlin, 2000). Moreover, several studies conceived foreign direct investments not only as a receptor, but also as a trigger of other economic phenomena such as stock market development or budget deficit reduction (Klein and Rosengren, 2002). Ever since 1983, Errunza revealed that foreign capital inflows exert an impact on stock market. Later, Yartey (2008) pointed out that foreign direct investment implies a consistent institutional and regulatory framework, convenient disclosure and listing requirements and fair trading policies, generating investors’ confidence. The positive perception among investors determines the increase of the investor’s base and participation, which attracts subsequently more capital inflows. Garcia and Liu (1999), Yartey and Adjasi (2007) have examined the relationship between foreign direct investments and other macroeconomic variables, highlighting the complexity of the interactions between variables. Singh (1997) identified a positive relationship between economic growth, stock market development and foreign direct investments. In line with the endogenous growth models (Romer, 1986, Grossman and Helpman, 1994, Lucas, 1998), Kiyota and Urata (2004) underlined that FDI complements domestic private investment and enhances technology transfer. In the light of these theories, foreign direct investments impact positively the...

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