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Is the relationship between FDI and inflation nonlinear and asymmetric? new evidence from NARDL approach

Hossain, Saddam and Masih, Mansur (2018): Is the relationship between FDI and inflation nonlinear and asymmetric? new evidence from NARDL approach.

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Abstract

The relationship between an FDI and inflation has been addressed in the literature. But they were based on linear and symmetric assumptions and the results are conflicting. We apply both ARDL and nonlinear ARDL which can test nonlinearity and asymmetric relationship between them. We use Bangladesh as a case study. The findings tend to indicate that there is a nonlinear cointegration between the FDI and inflation and that the relationship is symmetric in the short run but asymmetric in the long run. This is a very important finding for policy purposes. Moreover, the causality analysis tends to indicate that the FDI is the most exogenous (independent) variable and inflation is the most endogenous (dependent) variable. That implies that the FDI is determined externally and then it drives other variables such as, the trade openness, GDP, exchange rate and finally inflation. Hence the Government can use this Granger-causal chain to affect inflation through the monetary, fiscal and exchange rate policies.

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