| Summary: | This study investigates the impact of exchange rate volatility on the level of foreign direct
investment inflows in the Unites States of America, the United Kingdom, Canada and Japan, using
annual data starting from 1975 to 2011. Exchange rate volatility has been measured using four
different methods: a classic standard deviation, a moving mean difference value of the exchange
rate fluctuations, a moving average standard deviation with a 3-year window and, finally, using a
GARCH(1,1) model. The data was accounted for serial correlation, nonstationarity and cointegration
and the relationship between inward FDI flows (expressed as a percentage of GDP for each country)
and exchange rate volatility has been analyzed using OLS regressions and a panel data model, as well
as an error correction model to investigate the existence of a short-term relationship between the
two variables. While OLS estimates have shown that FDI inflows in three out of the four countries
analyzed are influenced by exchange rate volatility, no evident link between the two variables has
been found in the panel data analysis. In general, the mixed results obtained are proof that the
existence of a relationship between FDI inflows and exchange rate volatility varies across countries
and between different econometric models employed.
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