Expectations and the Dynamic Feedback between Foreign Direct Investment and Economic Growth

Escobari, Diego and Vacaflores, Diego (2014): Expectations and the Dynamic Feedback between Foreign Direct Investment and Economic Growth. Forthcoming in: International Economic Journal

Abstract

This paper sets to analyze the dynamic feedback between Foreign Direct Investment (FDI) and economic growth—larger FDI promotes higher GDP, while higher GDP can be achieved with higher levels of FDI. We use panels and a sample of 19 Latin American countries to estimate a dynamic FDI and a dynamic GDP equation that jointly characterize the evolution of both variables. We find that the dynamics of GDP and FDI are mostly driven by the expectations. Shocks of GDP or FDI were found to play no role affecting the dynamics.

• Item Type: MPRA Paper
• Language: English
• Keywords: Foreign Direct Investment, Economic Growth, Rational Expectations
• Subjects: F - International Economics > F3 - International Finance > F36 - Financial Aspects of Economic Integration; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F43 - Economic Growth of Open Economies; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O11 - Macroeconomic Analyses of Economic Development; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O47 - Empirical Studies of Economic Growth ; Aggregate Productivity ; Cross-Country Output Convergence; O - Economic Development, Innovation, Technological Change, and Growth > O5 - Economywide Country Studies > O54 - Latin America ; Caribbean

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