The role of US based FDI flows for global output dynamics

Florian Huber, Manfred M. Fischer, Philipp Piribauer

Publication: Working/Discussion PaperWU Working Paper

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Abstract

This paper uses a global vector autoregressive (GVAR) model to analyze the relationship between FDI inflows and output dynamics in a multi-country context. The GVAR model enables us to make two important contributions: First, to model international linkages among a large number of countries, which is a key asset given the diversity of countries involved, and second, to model foreign direct investment and output dynamics jointly. The country-specific small-dimensional vector autoregressive submodels are estimated utilizing a Bayesian version of the model coupled with stochastic search variable selection priors to account for model uncertainty. Using a sample of 15 emerging and advanced economies over the period 1998:Q1 to 2012:Q4, we find that US outbound FDI exerts a positive long-term effect on output. Asian and Latin American economies tend to react faster and also stronger than Western European countries. Forecast error variance decompositions indicate that FDI plays a prominent role in explaining GDP fluctuations, especially in emerging market economies. Our findings provide evidence for policy makers to design macroeconomic policies to attract FDI inflows in the respective countries.
Original languageEnglish
Place of PublicationVienna
PublisherWU Vienna University of Economics and Business
DOIs
Publication statusPublished - 1 Feb 2017

Publication series

SeriesDepartment of Economics Working Paper Series
Number239

WU Working Paper Series

  • Department of Economics Working Paper Series

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