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Oxford Economic Papers Advance Access originally published online on March 3, 2007
Oxford Economic Papers 2007 59(3):536-560; doi:10.1093/oep/gpl036
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© Oxford University Press 2007 All rights reserved

Common currencies and FDI flows

Stefano Schiavo

Observatoire Français des Conjonctures Économiques, Département de Recherche sur I'Innovation et la Concurrence, 250 rue Albert Einstein, 06560, Valbonne, France; e-mail: stefano.schiavo{at}ofce.sciences-po.fr


  Abstract

The paper investigates the impact of EMU on foreign direct investment flows. Using the option value approach to investment decisions, it is possible to show that exchange rate uncertainty hinders cross-border investment flows. By permanently fixing bilateral exchange rates, a currency union can then be expected to spur international investment. Results from a gravity model on a sample of OECD countries confirm the hypothesis that currency unions have a positive impact on FDI; moreover, adopting the same currency appears to do more than merely eliminating exchange rate volatility. These findings closely resemble those recently obtained in the trade literature.

Key Words: JEL classifications: F15 • F21


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