exchange rate strategies in the competition for attracting fdi · · 2014-03-18no 1999 – 16...

No 1999 – 16December

Exchange Rate Strategies in the Competitionfor Attracting FDI

_____________

Agnès Bénassy-QuéréLionel Fontagné

Amina Lahrèche-Révil

Exchange Rate Strategies in the Competition for Attracting FDI

4

TABLE OF CONTENTS

Summary.................................................................................................................................... 4

Résumé........................................................................................................................................ 5

1. Introduction .......................................................................................................................... 7

2. The theoritical model ......................................................................................................... 8

2.1. Existing literature............................................................................................................... 8

2.2. The model............................................................................................................................ 10

2.3. Resolution ........................................................................................................................... 12

3. Econometric analysis ......................................................................................................... 15

3.1. Methodology ...................................................................................................................... 15

3.2. Results ................................................................................................................................. 17

4. Policy implications .............................................................................................................. 18

4.1. The choice of an exchange rate regime .......................................................................... 18

4.2. The choice of an anchor currency................................................................................... 20

4.3. Monetary regionalism....................................................................................................... 22

Conclusion ................................................................................................................................. 24

Reference.................................................................................................................................... 25

Appendix.................................................................................................................................... 27

List of working papers released by the CEPII................................................................. 28

CEPII, document de travail n° 99-16

5

SUMMARY

The financial crises of 1997-1998 have highlighted the destabilizing impact of short runcapital flows to emerging countries. By contrast, foreign direct investment (FDI) is widelyviewed as a stable source of financing for developing countries. However, the debate onthe way to re-orient capital flows towards long term financing (through microeconomicreforms or capital controls) does not generally include the choice of an exchange-rateregime.

Here the choice of an exchange-rate regime is re-considered by integrating the determinantsof multinational firms locations. We consider the case of a risk-adverse multinational firmwhich contemplates relocating two alternative foreign locations in order to re-export. Weexplicit the trade-off between price competitiveness and a stable nominal exchange rate.We also show that the firm will consider both locations as substitutes or as complementsdepending on whether the two exchange rates against the investing country’s currency arepositively or negatively correlated.

The theoretical model is estimated on a panel of 42 developing countries receiving FDIfrom 17 OECD countries, over 1984-1996. The results confirm the importance of theexchange-rate regime. Specifically, nominal exchange rate instability is detrimental toforeign direct investment, and its impact compares with that of misalignments. In addition,from the perspective of the host country, the correlation between its bilateral exchange rateagainst the origin country and the one of alternative locations has a sizable impact oninward FDI.

These results draw three policy implications, which are illustrated through numericalsimulations. Firstly, the exchange-rate instability induced by a free floating regime isdetrimental to FDI inflows, even if it prevents the real exchange rate to appreciate.Secondly, the choice of a foreign anchor should be consistent with geography. This isbecause geography is a crucial determinant of the origin of FDI for each developingcountry: each country should stabilize its currency against the country or area which wouldpotentially be its major FDI supplier. Lastly, and overall, the building of currency blocscould be a way of increasing FDI to emerging countries, since if would allow investors todiversify the exchange rate risk across various locations. Such a “monetary architecture”would work better the more differentiated the specialization patterns within each currencyarea, which contrasts with optimum currency areas criteria.

JEL: F21, F23, F31, F33.


6

RÉSUMÉ

Les crises financières de 1997-1998 ont souligné l’impact déstabilisant des flux de capitauxà court terme dans les pays émergents. Par opposition, l’investissement direct étranger(IDE) est perçu comme un mode de financement stable pour le développement. Néanmoins,le débat sur la manière de réorienter les flux de capitaux vers le long terme (à travers desréformes microéconomiques ou des contrôles de capitaux) ne fait généralement pasréférence au choix du régime de change.

Ici, nous ré-examinons le choix d’un régime de change en intégrant les déterminants deslocalisations des firmes multinationales. Nous considérons le cas d’une firmemultinationale ayant de l’aversion pour le risque. Cette firme hésite entre deuximplantations étrangères, dans un but de ré-export vers son marché domestique. Nousmodélisons l’arbitrage entre compétitivité-prix et stabilité du taux de change nominal. Nousmontrons aussi que la firme va considérer les deux implantations comme substituables oucomplémentaires, selon que les taux de change des deux devises par rapport à la monnaiedu pays qui investit sont positivement ou négativement corrélés.

Le modèle théorique est testé sur un panel de 42 pays en développement recevant de l’IDEen provenance de 17 pays de l’OCDE, sur la période 1984-1996. Les estimationsconfirment l’importance du régime de change. En particulier, l’instabilité du taux de changenominal est défavorable à l’IDE, avec un impact d’ampleur comparable à celui d’unesurévaluation. En outre, du point de vue du pays d’accueil de l’IDE, la corrélation entre sontaux de change réel vis-à-vis du pays investisseur et ceux des localisation alternatives est undéterminant significatif de l’IDE entrant.

Les implications en matière de politique de change sont illustrées au moyen de simulationsnumériques. Premièrement, l’instabilité du taux de change induite par un régime de changeflottant est défavorable à l’IDE, même si elle empêche le taux de change réel des’apprécier. Deuxièmement, le choix d’un régime de change devrait être cohérent avec lagéographie. En effet, la géographie conditionne largement l’origine de l’IDE pour chaquepays en développement. Or chaque pays a intérêt à stabiliser sa monnaie par rapport aupays ou à la zone susceptible de lui apporter le plus possible d’IDE. Enfin et surtout, laformation de blocs monétaires pourrait être un moyen d’accroître l’IDE vers les paysémergents, car il permettrait aux investisseurs de diversifier le risque de change au traversde leurs implantations. Une telle « architecture monétaire » fonctionnerait d’autant mieuxqu’à l’intérieur de chaque bloc monétaire, les pays diffèreraient par leurs spécialisations, cequi contraste avec les critères avancés par la théorie des zones monétaires optimales.

JEL : F21, F23, F31, F33.


7


8

Exchange Rate Strategies in the Competition forAttracting FDI

Agnès BÉNASSY-QUÉRÉ(*), Lionel FONTAGNÉ(**)

and Amina LAHRÈCHE-RÉVIL(#)

1. INTRODUCTION

Empirical studies have shown that the structure of capital inflows in a low developedcountry is not neutral for growth and for macroeconomic stability. In particular, foreigndirect investment (FDI) is a more stable source of financing than portfolio investment(Lipsey, 1999), and it raises the global factor productivity through technological spillovers(Borenzstein and De Gregorio, 1995). The financial crises of 1997-1998 have reinforcedthat point of view: short run capital inflows have been pointed out as one of the majorcauses of the crises, both as inflows (through an excess of credit) and as outflows(triggering default).

In order to re-orient capital flows to longer term investment, the needs for microeconomicreforms is often stressed (see, for instance, Stiglitz, 1999). In addition, some economistshave been prudently advocating capital controls (for instance, Cooper, 1999). This debatehas been generally been separated from the debate on the choice of an exchange rate regimewhich highlights the difficulty of intermediate regimes in a world of free capital flows (see,for instance, Eichengreen, 1999 versus Frankel, 1999). However the exchange rate regimeshould have an impact on the composition of capital inflows. Portfolio investors should beindifferent to the exchange rate regime as far as derivative markets allow them to hedge.Conversely, foreign direct investors should worry about the exchange rate regime, becausethey cannot hedge at their horizon and are mainly interested in macroeconomic variablessuch as relative labor costs or purchasing power.

This leads to reconsider the choice of an exchange rate regime by integrating thedeterminants of location of multinationals. Traditional determinants like comparative costsof production are impacted by the level of the real exchange rate. In addition, the new tradetheory stresses the so-called "proximity-concentration trade off" (Brainard, 1993), acombination of increasing returns to scale and transportation costs explaining location

(*) CEPII, Paris.(**) TEAM (University of Paris I).(#) University of Amiens and CEPII.

We are grateful to Benoît Coeuré, Jean-Louis Guérin, Hélène Raymond, André Sapir, Khalid Sekkat, and to theparticipants of the CEDI and TEAM seminars at University of Paris-Nord and University of Paris I, for helpfulcomments on an earlier draft of this paper. All errors remain ours.


9

choices of multinational companies. Lastly, a recent strand of papers looks at the locationchoices of risk adverse firms facing exchange rate variability: the latter affects the locationof firms and hence the degree of specialization of countries (Goldberg and Kolstad, 1994;Ricci, 1997; Fontagné and Freudenberg, 1999). Hence it is worthwhile adopting anexchange rate regime capitalizing on micro-economic location strategies of risk adversefirms facing uncertainty, in order to attract the stable part of international capital flows,namely FDI.

Here, we provide a framework for designing an exchange rate strategy aiming at attractingFDI inflows. We explicit the trade-off between price competitiveness and a stable nominalexchange rate. We also show that exchange rate regimes in other emerging countries affectFDI in each specific country. Our findings justify the building of currency blocks as a wayof increasing the total amount of FDI (foreign direct investment) towards developingcountries and hence providing stability to international capital flows.

2. THE THEORETICAL MODEL

2.1 Existing literature

Broadly speaking, FDI is a transfer of capital and hence can be interpreted in terms ofcomparison of expected returns on alternative decisions of investment. Accordingly, theimpact of exchange rates on investment decisions is twofold: the level and the variability ofthe exchange rate matter.

Firstly, the level of the real exchange rate affects FDI in various ways, depending on thedestination of the goods produced.

If the investor aims at serving the local market, FDI and trade are substitutes. Variousmechanisms then can be considered. An appreciation of the local currency increases FDIinflows due to higher purchasing power of the local consumers. Conversely, a depreciationin the real exchange rate of the recipient country increases FDI through reduced cost ofcapital. The increase in foreign acquisitions of US firms during the depreciation of thedollar after 1985 has led to a burgeoning literature, of which Froot and Stein (1991) is acentral quotation: a strong dollar is associated with low inward FDI in the US. Finally, adepreciation of the dollar increases the relative wealth of foreign firms and hence theircapacity to invest in the U.S. in a context of imperfections on the capital market.

Alternatively, if FDI aims at producing for re-export, it complements trade, and anappreciation of the local currency reduces FDI inflows through lower competitiveness(higher labor costs).

Given that available data does not disentangle the various motivations of investors, adepreciation in real terms is generally shown to induce more FDI inflows (see Ito et alii,1996 or Goldberg and Klein, 1997). In the same way, Cushman (1988) and Barrel and Pain(1998) highlight the negative impact of an appreciation of the real exchange rate on inwardFDI. Klein and Rosengren (1994) disentangle the relative wealth versus labor costschannels for seven industrial countries investing in the U.S. over the period 1979-91. Notsurprisingly, given the host economy under consideration, they find that only the formerchannel has played a significant role.

Having such perspective of capital transfer in mind, the second impact of exchange rates onFDI decisions is associated with its variability. Darby et al. (1999) emphasize the value of


10

the option to wait, in the line of Dixit and Pindyick (1994), in presence of uncertainty andsunk costs. Notwithstanding such option, exchange rate volatility affects FDI in variousways. Cushman (1988) advocates that producing on the destination market is a goodsubstitute to exports if there is a strong uncertainty on exchange rates. However, if theproduction is partially re-exported this benefit vanishes. As a whole, if the theoretical effectof exchange rate volatility is quite ambiguous, from an empirical point of view, Cushman(1988) finds a positive impact of volatility on outward FDI.

However, FDI decisions can also be referred to as location strategies. Interestingly, thelocation of multinational activities depends on comparative advantages, but also ontransportation/transaction costs and increasing returns (Horstman and Markusen, 1992,Brainard, 1993, Markusen, 1995). As a whole, the choice of locating abroad is motivatedby lower costs, a decision depending once again on the investor’s structure of sales. In casethe multinational firm intends to sell on the host market, transportation costs reinforce theincentive for producing locally. Conversely, transportation costs reduce the incentive forFDI if production is to be re-exported. In both cases, high transportation costs limit thebenefits of concentrating the production in a small number of locations. As referred toabove, the level of the real exchange rate determines the production costs in the hosteconomy. More interestingly, turning to the exchange rate instability, the impact istheoretically ambiguous. A foreign firm facing large exchange rate volatility will producein the local country if it intends to sell on the local market, but refrain from doing so if itintends to re-export.

Lastly, FDI occurs in a context of high uncertainty, as compared to domestic investment.In theory, risk aversion should lead firms to diversify across possible locations. Accordingto Aizenmann (1992), FDI permits to allocate production in the subsidiary that is thecheapest and thus to adjust to various shocks. Accordingly, investing abroad and bearingan exchange rate risk means, broadly speaking1, buying the option to face alternative sets ofproduction costs if such shocks occur. In total, “countries whose exchange rates arenegatively correlated with global returns to capital (such as oil-exporting countries) mayactually benefit from their role as portfolio hedges. An increase in these countries’exchange rates may actually raise their FDI inflows on diversification grounds” (Ito et alii(1996), p. 54). Similarly, investing in countries with negatively correlated exchange ratesshould be a way of diversifying FDI. In this paper, we investigate this possibility andhighlight its role in the choice of an exchange rate regime.

1 More precisely, buying an option would mean unbounded potential gains and bounded losses, whereas theinvestor here bears the entire exchange risk.


11

2.2 The model

We consider the case of a risk-averse multinational firm which contemplates relocating intwo alternative foreign locations in order to re-export 2. Like Cushman (1988), we follow atwo-period framework. In the first period, the firm decides where to invest. The decision torelocate abroad is already taken although the investor does not yet know where to do it.There is no option to wait, as opposed to the strand of literature launched by Dixit andPindyck. The capital cost and the interest rate are certain. In the second period, the firmproduces.

We consider the decision of allocating production in alternative locations in order to sell onthe investor's market (as defined by its currency). The firm faces labour costs whichdepend on local wages (which are known and do not react to exchange rate variations) andon the evolution of the exchange rate (which is unknown by the time the firm invests). Therigidity of wages can be justified by the low share of imported goods in local consumption.Indeed, local wages adjust very slowly to exchange rate fluctuations in LDCs as illustratedin Chart 1.

Chart 1: Nominal Exchange Rate and Nominal Wages: The Case of Korea

0,00

50,00

100,00

150,00

200,00

250,00

janv-9

5av

r-95

juil-9

5oc

t-95

janv-9

6av

r-96

juil-9

6oc

t-96

janv-9

7av

r-97

juil-9

7oc

t-97

janv-9

8av

r-98

juil-9

8oc

t-98

janv-9

9av

r-99

juil-9

9

Monthly wages (in wons) Monthly exchange rate (in wons per USD)

Sources: IMF (exchange rate) and Bank of Korea (wages).

In our model, the price is given in the investor’s currency, and there is no residual marketvalue of the capital after the production period. The latter assumption can be justified bythe high level of sunk costs. We also assume that capital inflows have no impact in termsof real appreciation: they can be assimilated to a positive supply shock and do not carryinflation pressures in the host economy (Artus, 1999).

2 Available data do not disentangle greenfield investments from mergers and acquisitions. Our approach matchesbetter the former since mergers and acquisitions are less complementary to trade (Swenson, 1999).


12

Finally, we add both a fixed cost in local labor (to be interpreted as training costs) andtransportation costs. The former is an incentive to invest in a single country in order toomit the replication of fixed costs. Transportation costs are an hindrance to trade in goods(Brainard, 1993). Hence, it could be advocated that transportation costs boost FDI andlocal production to serve the domestic market. However, since we are interested inmodeling alternative strategies of relocation, we are conversely interested in trade in goods.In this respect, transportation costs are expected to have a negative impact on re-exportsand thus on FDI. To put it differently, we assume complementarity between FDI and trade(Eaton and Tamura, 1994), not substitution. Here, transportation costs will influence thesensitiveness of FDI to costs and to exchange rate uncertainty.

The investing firm chooses between investing in country 1 or 2 according to their levels ofwages, capital prices, exchange rates, according to the magnitude of transportation costsfrom the subsidiary to the destination market of goods produced, and according to theprospects for exchange rate variations. Due to its risk aversion, it also takes exchange rateuncertainty into account. Because there are two possible locations, the covariance betweenthe two exchange rates will play a crucial role in our model.

The nominal profit of the investing firm is, in its own currency:

( ) 2222211111'2222

'111121 //)/()/( ττττπ SKRrSKRrSLFWSLFWQQP −−+−+−+= (1)

Where P is the price of the goods on the investor’s market; Qi, Li and Ki are output, laborand capital used by the firm in country i; Wi and Ri are nominal wage and capital price incountry i, in local currency. Both Wi and Ri are assumed to be given for the investing firm(no pressure on the local markets of labour or capital goods). The fixed cost F is assumedidentical in both locations, whereas the transportation cost iτ/1 is different.3 ri is one plusthe nominal interest rate related to FDI in country i.4 Si is the nominal exchange rate ofcurrency i against the investor’s currency (a rise in Si means an appreciation of currency i).Finally, S’i denotes the nominal exchange rate in the second period. Like in Cushman(1988), it is the only uncertainty introduced in the model.

The technology is similar in both locations (it is internal to the multinational). Departingfrom the factor proportion hypothesis, we use a very simple specification where capital andlabour are complements:

kKLQ i

ii == (2)

Where k is the constant capital/labor ratio.

The firm maximises its utility which depends positively on expected profit Eπ, andnegatively on its variance Varπ, with φ being the risk aversion coefficient:

21 ,QQVarEMaxU πφπ−=

(3)

3 We assume standard iceberg transportation costs for tractability. This transportation cost is proportional tooutput. It does not affect the fixed cost which can be interpreted as a training cost. Hence, the fixed cost is moreimportant compared to variable costs when the host country is close to the investing country.4 It is a mix between the world interest rate and the local interest rate, in order to take account of re-investingprofits as a way of financing investment, in countries where repatriating benefits was often constrained in the past.


13

2.3 Resolution

The two first order conditions lead to the following reaction functions5:

−

+−

−−=

−

+−

−−=

FFQ

VarS

)S,S(CovWW

VarSW

/SRkrES)/W(PQ

FFQ

VarS

)S,S(CovWW

VarSW

/SRkrES)/W(PQ

''

'

''

'

211

2

21221

22

2

2222222222

122

1

21112

12

1

1111111211

2

2

ττ

τ

φ

τττ

ττ

τ

φ

τττ

(4)

The production in country 1 depends on costs and uncertainty concerning country 1 (firstterm), but also on the outcome in country 2 (through the second term). Three cases can bedistinguished.

1st case: ( ) 0, 21 =SSCov . The productions carried out in the two countries are

independent. Each one depends on the (positive) difference between the price of the goodand the unit costs expected, and on the uncertainty surrounding these costs: a rise in VarS’ireduces Qi, other things equal.

2nd case: ( ) 0, 21 >SSCov . The productions in the two countries are substitutes. This isbecause when one currency appreciates (raising costs in this country), the other one alsoappreciates. Hence, diversifying locations is useless: costs generally grow in the twolocations simultaneously. In this case, better conditions in one country lead to a transfer ofFDI from the other country.

3rd case: ( ) 0, 21 <SSCov . The productions in the two countries are complements: whencosts rise in one country – because its currency appreciates – they generally decrease in theother one. However, in this case the firm raises (reduces) its production in both countries atthe same time when costs are reduced (increased) in one of them. Diversifying its locationsreduces the overall risk on its profit.

The three cases are represented in Chart 2, and the impact of reduced costs in country 1(through a currency devaluation for instance) is studied. In the three cases, the shockincreases output in country 1. But in the independence case, production is unaffected incountry 2, whereas it declines in the substituability case and rises in the complementarycase. Note that the smaller the transportation cost (the larger τ ), the larger the influence ofthe covariance term: the firm will arbitrate mainly between close locations.

5 If the variance is zero (in the case of a currency board for instance), then the firm maximizes its expected profit.The first order condition then leads to

111111 /)'( τkSRrESWP += , which is a form of PPP.


14

Chart 2: The Relationship between Production in the Two Locations

Impact of a reduction in country 1 costs

1a: independence

Q 1

Q 2

Q 2(Q 1)

Q 1(Q 2)

Q 1* Q 1

*’

Q2*=Q2

*’

E E’

1b: substituability 1c: complementarity

Q1

Q2

Q2(Q1)

Q1(Q2)

Q1* Q1

*’

Q2*’ E

E’Q2

*’

Q1

Q2

Q2(Q1)

Q1(Q2)

Q1*

Q1*’

Q2*’

EE’

Q2*

Hence, the allocation of FDI is not necessarily a zero-sum game: in the case exchange ratesare negatively correlated, both locations take advantage of a reduction of costs in onecountry. Conversely, in the substituability case, a devaluation in country 1 will reduce FDIto country 2 except if the latter also devaluates or reduces local costs (for instance throughlowering capital prices or liberalizing the capital account so that the interest rate convergesto the world level).

Solving the model leads to:

ij

j

i

ij

ii

iii F

WWC

VarSWCQ τ

ττρτ

ρφ−

−

−=

'22

2 )1(21

(5)

where ρ denotes the correlation between '1S and '

2S ,


15

i

iii

i

iii

SRkr

WESPC

ττ−

−= ' measures the competitiveness of country i,

The existence of fixed costs imply that the price of the goods must exceed the local costs inorder for the firm to invest abroad6. In addition, we find the standard trade-off betweenfixed costs and transportation costs referred to above7: would the choice be betweenexporting and investing abroad, high specific fixed costs (F) would reduce the incentive toproduce abroad. However, since we are interested in the choice between two foreigncompeting locations devoted to re-export, a rise in fixed costs reduces output in bothlocations, but especially in the host country facing low transportation costs with theinvesting country ( ii FQ τ−=∂∂ ). For distant locations, fixed costs are largely offset bytransportation costs as a deterrent to foreign inward investment. In contrast, close oradjacent countries are highly sensitive to changes in fixed costs, transportation costsremaining negligible in any case. To put it differently, since relocating computer assemblyfor the US market is concerned, Mexico is more concerned by plant economies of scalethan Beijing.

Turning to the arbitrage between the two locations according to expected costs and to theuncertainty pattern, the results can be summarized as follows:

• Lower expected costs in country 1 (higher C1) induce more output in that country,especially if transportation costs are low (τ1 high).

• Lower uncertainty in country 1 (lower VarS’1) increases the sensitivity of output incountry 1 to local costs.

• Lower expected costs in country 2 reduces, increases or leaves unchanged output incountry 1 depending on whether the two exchange rates are positively, negatively ornot correlated respectively.

• Output in country 1 is more sensitive to country 2 costs if transportation costs are lowbetween both countries and the investing country (the product 21ττ is high).

A preferential commercial scheme, allowing products exported from i to enter moreliberally in the investing country, can be interpreted in the same way. Such discriminationwould reduce transaction costs between i and the investing country, hence increase iτ , andattract FDI detrimental to j.

6 Note that the lower bound of output is zero.7 It can be surprising that fixed costs enter the first order conditions: notice however that it is due to the calculationof the variance of the profit.


16

3. ECONOMETRIC ANALYSIS

3.1 Methodology

We test the theoretical model on a panel of 42 developing countries receiving FDI from 17investing countries over 1984-1996. The dependent variable is the logarithm of the stock ofFDI received by country i from country k. It is expressed in US dollars at constant worldprice. The declarations of the OECD reporting countries are used. Hence, we considermirror data. This variable is highly unstable, and it does not exhibit a trend (Chart 3).Besides, it should be noted that, due to missing values, the cross-section dimension of thesample is much more important than the time series dimension.

Chart 3: The Real FDI Stock in Various Emerging Areas

0

500

1000

1500

2000

2500

3000

3500

4000

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

Mill

ion

USD

x 1

00, a

t 199

1 w

orld

pri

ce

AsiaMENA countriesLatin AmericaCEECs

Note: MENA = Middle East and North African.CEECs= Central and Eastern European CountriesYears 1996 to 1998 were removed from the graph due to missing data in some countries.

Source: OECD.

We aggregate emerging countries in an emerging zone indexed j in order to get analternative location for each country i (for simplicity, we assume that each emergingcountry considered in the estimation is small in the aggregate). The equation to beestimated is:

( ) kitt

kki

kit

kiti

ik

ikjt

kit

kit

kit

kit

ueeDISTaSVolaCaOIL

OPENaDISTaCaSVolaCaaFDI

++++++

++×+++=

loglog

loglogloglog

876

543210 ρ (6)

The competitiveness of country i (Ci in the theoretical model) is proxied by the uncertain-priced real exchange rate of i against each investing country k (Ci

k), calculated with


17

consumer price indexes. Consistently, the competitiveness of the alternative location (Cj inthe theoretical model) is the real exchange rate of the emerging countries aggregate jagainst each investor k (noted Cj

k).8

The uncertainty on the nominal exchange rate is given by the quarterly volatility of countryi nominal exchange rate against k, defined as the coefficient of variation of the nominalexchange rate over the past three years ( k

itSVol ). The correlation between i/k and j/k

exchange rates is calculated over the same period ( kitρ ).9

Transportation costs are proxied by a measure of distance between i and k ( kiDIST ).10

The distance between alternative locations and the investing country is assumed constant onaverage throughout the sample.

In addition to the theoretical model referred to above, we introduce an openness variable(OPENi), which is designed to control for the nature of foreign direct investment: if FDIaims at re-export, then it should translate into a large openness ratio (the ratio of exportsplus imports to GDP), since entering the small domestic markets of host economies canhardly be the investor's motivation.11

A dummy (OILi) is also introduced to control for the particular behavior of oil exportingcountries. In these countries, FDI is mostly related to the energy sector, which is itselflinked to the real exchange rate through a Dutch disease effect: when the energy sectorbooms, the real exchange rate tends to appreciate, but at the same time FDI is attractedbecause its profitability in this sector is increased. Hence, we should expect a positive linkbetween real appreciation and FDI, in contradiction with the theoretical model, whichmainly describes manufacturing FDI. Along the same line, the effect of exchange ratevolatility is likely to be important in oil exporting countries, since the law of one priceapplies to oil exports: a large volatility in the nominal exchange rate means a largeuncertainty on local operating costs and thus on profits. Lastly, transportation costs areexpected having little role in the location strategy since the location of primarycommodities is determined by the nature. This contrasts with the aim of our model that isinterested in footloose industries.

Finally, we add fixed effects for time (et) and for investing countries (eh). The latter controlinter alia for the size of the investing country, whereas the former catch trends in the worldeconomy such as deregulation.

We cannot a priori exclude that the real exchange rate be influenced by FDI inflows as onecomponent of capital inflows. However Artus (1999) shows that there is little correlationbetween the average net FDI flows (as a percentage of GDP) and the average growth of the

8 This synthetic measure of competitiveness encompasses variables impacting on productivity, including humancapital. The definition of variables and data sources are detailed in Appendix.9 The use of past volatilities and correlations can be justified by the auto-regressive nature of the volatility: exceptfor institutional breaks like the settlement of a currency board, looking at past volatility helps to forecast futurevolatility.10 We are grateful to Michaël. Pajot for kindly providing this measure.11 It could be argued that some host countries of our sample are large enough to attract FDI aiming at serving thelocal market, which would lead to a somewhat different impact of competitiveness and exchange rate volatility inthese countries. However these countries also receive re-export FDI for which their contribution is large given thefact that we did not introduce dummies for recipient countries.


18

real exchange rate, for a set of 18 developing countries over the 1992-1996 period. Hence,we can rule out reverse causality.

3.2. Results

The result of the econometric estimation is reported below.

+−−++

−×−−=

−−

−−−

ki

kit

kitii

ki

kjt

kit

kit

kit

kit

DISTSVolCOILOPEN

DISTCSVolCFDI

log357.0007.0log463.0910.0

log347.0log034.0630.0log231.0log

)174.7()996.1()819.3()563.16(

)174.7()256.2()384.3()729.2(ρ

(7)

Nb obs. = 1749; 619.02 =R

The Student statistics are given in parentheses. All the coefficients are significant at 1%,except that on exchange rate volatility in the oil exporting countries which is significant at5%.As expected, a depreciation (rise in the real exchange rate) of i against the investing countryincreases FDI inflows (competitiveness effect), whereas an increase in the nominalexchange rate volatility tends to reduce FDI (volatility effect). The coefficient associated to

the multiplicative variable kjt

kit C×ρ (interdependence effect thereafter) also bears the

negative, expected sign: when the exchange rate of other emerging countries is positivelycorrelated to that of country i, an improved competitiveness in other emerging countriesreduces FDI inflows to country i (through a substitution effect); conversely, in case of anegative correlation, an improved competition in other emerging countries raises FDI tocountry i (through a diversification effect).

Geographic distance (which proxies transportation costs) accounts for a significant part ofthe investing behavior of industrialized countries, consistently with the literature oneconomic geography. Moreover, openness has a significant impact on FDI, whichhighlights that these countries receive a large proportion of FDI aiming at re-exporting atleast partially their output.

The effect of a real appreciation is opposite in oil producing countries compared to otheremerging countries: it raises FDI inflows. This is consistent with the Dutch disease referredto above.12 The impact of volatility is reinforced compared to other countries, whereas thecoefficient on economic distance is almost zero (0.357-0.347=0.010). The latter outcomecan firstly be explained by the fact that oil producing countries are all far from potentialinvestors (mainly the United States). In addition, as already noticed, the location ofprimary commodities is determined by the nature and location strategies are consequentlyhighly constrained.

12 See Corden and Neary (1982) for theoretical developments on the Dutch disease.


19

4. POLICY IMPLICATIONS

Our estimations highlight the trade-off to be made between price competitiveness andnominal exchange rate stability. More precisely, it is shown that a 1% appreciation in thereal exchange rate reduces the FDI stock by 0.23%, whereas a 1 point increase in exchangerate volatility reduces it by 0.63%. The trade-off arises because an emerging countrytypically suffers from a positive inflation differential with investing countries. Hence,preventing the real exchange rate to appreciate means allowing the nominal exchange rateto depreciate periodically, which induces some volatility.

Another implication of our estimates concerns the choice of a specific anchor: sincepotential anchor currencies fluctuate to a large extent among themselves, it is not possibleto monitor price competitiveness and reduce exchange rate volatility against all of them atthe same time. Hence a second trade-off must be considered across possible anchors.

Finally, the trade-off is made more complex by the fact that it must take the behavior ofother emerging countries into account. Namely, it is important for a recipient country todifferentiate its exchange rate regime from those of other emerging countries in order tobenefit from the diversification of investments from risk adverse multinational firms. Thislast feature is captured by the negative coefficient on the correlation variable. Because allreal exchange rates are taken as an index (on a 100 basis), the order of magnitude of theirdecimal logarithm is 2. Hence, a drop in the correlation between i/k and j/k (k being theinvestor’s currency) from 1 to zero increases FDI to country i by 6.8%, which is equivalentto a 30% depreciation (in country i) or a 10 point drop in volatility.

In this Section, we successively illustrate these three main implications through simulatingand comparing various exchange rate arrangements. Switching from one regime to anotherentails some political as well as economic costs in the short run, which are not taken intoaccount in our static framework. Considering a relatively long term horizon, however, wecan ignore these costs.

4.1. The choice of an exchange rate regime

In a first step, we assume there is a single investor country and a single recipient countrywhich suffers from a 10% inflation differential with the investing country. For simplicity,we take the case of a country which is not an oil exporter. We also assume that it keeps thesame exchange rate regime during three years. We compare four stylized exchange rateregimes for the recipient country.

In the “successful currency board”, the nominal exchange rate is held constant, andinflation drops after a short term adjustment to the level of the anchor country. The fixedexchange rate regime is assumed identical to the currency board except that the inflationdifferential remains positive. In the crawling peg or managed floating regime, nominaldevaluations compensate for inflation differentials. Finally, in a hypothetical “successfulfree floating”, exchange rate volatility would be higher (20% in our simulation), the realexchange rate remaining constant.

By construction, the “successful currency board” appears the best regime for attracting FDI,because the real exchange rate stays constant without any nominal exchange rate volatility.This “credibility in a bottle” (cf. Frankel, 1999) regime is taken as a benchmark, and otherregimes are compared to it in Table 1. Of course, there may be other ways of reaching the


20

benchmark level, for instance through a credible fixed peg or a credible inflation target.Conversely, some inflation differential can remain in a currency board.13 In a similar way,the impact of intermediate and floating regimes on inflation can be discussed. The variousregimes studied here are stylized, our goal being to compare contrasted regimes. Ifinflation was to be reduced in the fixed exchange rate regime, then the loss incompetitiveness would be smaller, and this regime would be closer to the benchmark.Conversely, a fixed exchange rate regime would unlikely survive inflation differentials wellabove 10%.

As expected, FDI inflows are lower in our rather unsuccessful fixed peg regime than withthe successful currency board. This is due to the loss of competitiveness. The crawling pegand the managed floating regime have an intermediate impact on FDI: because they keepcompetitiveness constant with limited volatility, they appear better than both a fixed peg ora “successful free floating”. The evaluation of the latter crucially depends on theassumption concerning volatility. Should volatility be smaller, then this scenario wouldlook like a crawling peg or managed floating regime.

Hence, our very simple, two-country framework shows that the exchange rate volatilityinduced by a free floating regime is detrimental to FDI inflows, even if it prevents the realexchange rate to appreciate. By construction, a “successful” currency board is the bestway of attracting FDI. This is not to say that currency boards should be adoptedeverywhere (as underscored by Frankel, 1999). But, in evaluating each exchange rateregime, it should be stressed that exchange rate stability has a sizable impact on FDI whichcompares to the impact of price competitiveness.

Table 1: Impact of Various Exchange Rate Regimes after three years on the Stock of FDI

Exchange rate regime Successfulcurrency

board

(benchmark)

Fixed peg Crawlingpeg or

managedfloating

Successfulfree

floating

Related assumptions

- inflation differential p.a. 0 10% 10% 10%

- nominal exchange rate after 3years

100 100 133 133

- exchange rate volatility during theprevious 3 years

0 0 8% 20%

- price competitiveness after 3 years 100 73 100 100

FDI 100 93.8 95.0 87.4

Source: simulations based on Equation (7) with OIL held to zero.

13 However, the remaining inflation in a currency board may reflect a Balassa effect which does not affect externalcompetitiveness.


21

4.2. The choice of an anchor currency

Here, we still take the case of a single host country. But now there are two investorcountries: the United States and the euro zone.14 If the euro/dollar exchange rate remainsconstant, then choosing the euro or the dollar as a monetary anchor is indifferent, and thetwo-country framework still applies. However emerging countries should not put too muchhope on a possible coordination of G7 countries to reduce exchange rate fluctuationsbetween their currencies. Hence the question is that of the resilience of exchange rateregimes in emerging countries to these fluctuations.

Here we consider the successful currency board against the dollar as a benchmark, and weassume the euro depreciates by 20% against the USD (progressively along three years).15

Due to its peg to the dollar, currency i appreciates against the euro, which reduces the FDIstock coming from the euro zone by more than 8% (Table 2). In the case of a crawling pegagainst the dollar, FDI coming from the euro zone is slightly higher because volatilityagainst the euro is smaller, but FDI coming from the United States declines by 5% due tothe exchange rate volatility against the dollar. Finally, the crawling peg is superior whendefined against a basket of the two currencies than against the dollar only. This is becausethen the currency depreciates against the dollar while appreciating to a lesser extent againstthe euro, without full compensation through higher volatility.

Of course, if the euro appreciates, then the results are reversed: a currency board against thedollar allows the competitiveness against the euro to rise with no change in thecompetitiveness against the dollar; a crawling peg against the USD also allowscompetitiveness to rise against the euro; finally, a crawling peg against a basket leads to afall in the competitiveness in dollar terms but a rise in euro terms.

Hence, the best solution would be to choose the depreciating currency as an anchor. Thereis some evidence that Asian emerging countries had such a strategy in the past (Takagi,1996). We can interpret the failure of the yen to become an anchor currency as aconsequence of the “ever rising yen” (McKinnon and Ohno, 1997). However, pegging to adepreciating anchor should entail switching from one anchor to another over time, which isnot possible in a pre-announced regime.

When changing the monetary anchor over time is not possible, then the objective should beto minimize the volatility of FDI inflows. Table 2 shows that this can be done through acurrency board against the currency of the main investor country. When FDI comes fromvarious countries in similar proportions, it is interesting to see that a basket peg does notperform much better than a peg to a single currency. This is because it introduces morevolatility with a small gain in average competitiveness. In general, however, one origin isprominent in FDI (see Table 3). The case of MENA16 countries is particular since the mainsource of FDI differs dramatically across them. Consequently, geography does not onlydetermine FDI; according to our simulations, it also determines the choice of a monetaryanchor.

14 The same reasoning can be applied to Japan instead of the euro zone.15 For simplicity we assume no inflation differential between the United States and the euro zone.16 Middle East and North African.


22

Table 2: Impact of a 20% Depreciation of the Euro against the US dollar

Exchange rateregime

Successful currencyboard against USD

(benchmark)

Crawling peg againstUSD

Crawling peg againstbasket

(50% $, 50% euro)

USinvestor

Euro-zoneinvestor

USinvestor

Euro-zoneinvestor

USinvestor

Euro-zoneinvestor

Related assumptions

- inflation differentialp.a.

0 0 10% 10% 10% 10%

- nominal exchangerate after 3 years

100 80 133 106 146 120

- exchange ratevolatility during theprevious 3 years

0 6% 8% 3% 10% 5%

- pricecompetitiveness after3 years

100 80 100 80 110 90

FDI 100 91.6 95.0 93.5 96.0 94.5

- 50% US 50% eurozone*

95.8 94.3 95.3

* assuming FDI comes from the two areas in equal weights.Source: simulations based on Equation (7) with OIL held to zero.

As a whole, our analysis would advocates either managed floating regimes with changinganchors over time, or a polarization of exchange rate regimes consistently with economicgeography. This is one first step towards monetary regionalism. The second step comesfrom interdependencies between emerging countries, which we study in Section 4.3.


23

Table 3: The Origin of FDI in Selected Emerging Areas (1995-1996 average)

FDI stock from (in % of total stock)FDI stock in Stock(billions of USD at1991 world price)

The EU North America Japan

CEECs 14.6 83.1 15.6 1.3Latin America 110.4 30.1 64.1 5.8MENA countries 7.8 44.9 51.8 3.3Asia 130.2 29.6 41.5 28.9Total sample 263.0 33.2 49.9 16.9Note: EU = Austria, Denmark, Germany, Finland, France, Great Britain, Italy, the Netherlands, Sweden

North America = The US, CanadaCEECs = Bulgaria, the Czech Republic, Hungary, Poland, Romania, Slovenia, the Slovak Republic.Latin America = Argentina, Brazil, Chile, Colombia, Costa Rica, Mexico, Panama, Venezuela.MENA countries = Algeria, Egypt, Israel, Morocco, Turkey.Asia = China, Hong Kong, Indonesia.

Source: OECD.

4.3. Monetary regionalism

Here we study the impact of other emerging countries choosing their own exchange rateregimes independently. This has an influence on FDI received by each country through thecorrelation between i/k and j/k exchange rates, h being the investing country and j the groupof other emerging countries. As seen in Section 4.2, several monetary anchors are availableboth for country i and for other emerging countries j. Hence the optimal arrangement forcountry i will depend on the choice made by the rest of the emerging world.

Here we take as a benchmark the extreme situation where all emerging countries (includingcountry i) have a currency board against the USD.17 Because all exchange rates against theUSD are fixed, the correlation between i/$ and j/$ is zero, whereas the correlation betweeni/euro and j/euro is 1. If country i switches to a currency board against the euro, thecorrelation between i/$ and j/$ is still zero (because j/$ is constant), but the correlationbetween i/euro and j/euro falls to zero (because i/euro is constant). The latter fall incorrelation raises FDI from the euro zone by 6.8%, because i and j are no longer substitutes.Note that this rise in FDI also happens in the other host countries. Hence, there is a globalgain in differentiating exchange rate policies across countries. However, complementarityeffects can only occur if negative correlations appear among currencies18, which impliesthat emerging countries choose between three monetary anchors (instead of only two in theprevious case).

Assume now that other emerging countries (j) have a currency board against the yen.19 Ifcountry i still has a currency board against the USD, then the correlation between i/$ and j/$is zero (because i/$ is constant), while the correlation between i/euro and j/euro is positiveand set to 0.8 (in reference to the correlation between $/ecu and yen/ecu over the 1996-1998

17 We take currency boards because in these regimes there is neither exchange rate volatility, nor real appreciation.Hence, it allows to concentrate on interdependence effects only.18 Diversification does not necessarily imply negative correlations: zero correlations among a large number ofexchange rates would produce some diversification. But negative correlations offers even greater diversification.19 Pegging to the yen is not the only possibility of monetary regionalism in Asia. For instance, such a regionalismcould come from a common currency between Hong Kong and Singapore, as suggested by the Hong KongTreasury Secretary on October 22nd 1999 (AFP release).


24

period during which it was even higher). In this case, the stock of FDI is slightly increasedin country i (by 1.4%) compared to the benchmark. Conversely, if country i has a currencyboard against the euro, the correlation between i/$ and j/$ is negative and set to –0.8 (inreference to the correlation between ecu/$ and yen/$ over the 1996-1998 period), while thecorrelation between i/euro and j/euro falls to zero (because i/euro is constant). In this case,the stock of FDI coming from both the United States and the euro zone stands above thebenchmark by 5-7%.

Of course, the latter case is unrealistic since many countries, especially in Latin America,will likely continue managing their currencies against the dollar. However it gives an ideaof the benefits of monetary regionalism versus hegemony as far as FDI is concerned. Agenuine monetary regionalism would include currency boards (or other forms of pegging)against three main currencies. Such an international monetary system would appear as amixture of the cases described in Table 4. It is clear that FDI would increase compared to asituation of generalized dollarization (our benchmark) or even compared to a bipolarinternational monetary system (south-west of the Table).

Of course, the results of this last simulation are dependent on the negative correlationbetween ecu/$ and yen/$ over the 1996-1998 period. There is no guarantee of such acorrelation over the future. However, should this correlation be positive in the future,emerging countries would not loose from monetary regionalism.

Hence, monetary regionalism could be a way of increasing FDI to emerging countries,since it would allow investors to diversify the exchange rate risk across various locations.

The similarity in specialization of developing countries within a given region acts howeveras an opposite force. As demonstrated by our model, countries competing to attract FDI inthe same industry benefit from being in opposite phasing with the investor's currency.Conversely, following similar exchange rate policies is not detrimental if they are not closecompetitors on foreign markets. This mechanism contradicts the usual optimum currencyarea argument which highlights the role of common shocks (i.e. similar specializations)when weighting the pros and cons of a currency union. The small GDP weight ofdeveloping countries justifies an external trade concentrated on relationships withdeveloped countries rather than between the formers. Hence, intra-regional openness islower for developing regions, and the traditional OCA argument in terms of similarspecialization does not hold. On the contrary, monetary regionalism is easier in ourframework if the various countries of the region do not exhibit the same specializationpattern.


25

Table 4: The Impact of Interdependencies between Host Countries

Currency board againstthe USD in country i

Currency board againstthe euro in country i

k = $ k = euro k = $ k = euro

Currency board against the USD in other host countries

- Correlation between i/k and j/k 0 1 0 0

- FDI 100 100 100 106.8

Currency board against the yen in other host countries

- Correlation between i/k and j/k 0 0.8 -0.8 0

- FDI 100 101.4 105.4 106.8

Source: simulations based on Equation (7) with OIL held to zero.

CONCLUSION

The financial crises of 1997-1998 have given birth to a debate on the reform of the so calledinternational financial architecture. Exchange rate regimes in emerging countries constituteone pillar of this new architecture, as testified by the creation of the G20 which gathersministers from the G7 and from a set of large emerging countries to cooperate on monetaryand financial affairs.

Our contribution can be viewed as a demonstration that exchange rate volatility does matterfor foreign direct investment, and hence for a stable financing of growth in emergingcountries. In addition, we show that exchange rate regimes in emerging countries should bedefined in a global framework given the large externalities they encompass. Moreprecisely, our analysis shows that monetary regionalism can be a way of increasing FDI toemerging countries as a whole. The frontiers of monetary areas would then be stronglyinfluenced by geography, as FDI is.

Accordingly, we point out two complementary patterns of the future financial architecture:the building of currency blocks and the organization of the world economy in regions,which are shown here to be beneficial, as far as inward FDI and the related benefits of it foremerging countries (stability, technological progress) are concerned.


26

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BARREL, R., PAIN, N. (1998), "Real Exchange Rates, Agglomeration and Irreversibilities:Macroeconomic Policy and FDI in EMU", Oxford Review of Economic Policy, 14, (3), 152-167.

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BRAINARD, L.S. (1993), "An Empirical Assessment of the Proximity-Concentration Tradeoff Between Multinational Sales and Trade", NBER Working Paper , 4580.

COOPER, R. (1999), "A Tour of International Financial Reform", interview in Challenge, 42(4), 5-28.

CORDEN, W .M., NEARY, J.P. (1982), "Booming Sector and De-Industrialisation in a SmallOpen Economy", Economic Journal, 92, (368), 825-48.

CUSHMAN, D.O . (1988), "Exchange-Rate Uncertainty and Foreign Direct Investment in theUnited States", Weltwirtschaftliches Archiv, 124 (2), 322-336.

DARBY, J., HUGHES HALLETT, A.H., IRELAND, J., PISCITELLI, L. (1999), "The Impact ofExchange Rate Uncertainty on the Level of Investment", The Economic Journal , 105, C55-C67.

DIXIT, A., PINDYCK, R. (1994), "Investment under Uncertainty", Princeton University Press.

GOLDBERG, L.S., KOLSTAD, C .D. (1994), "Foreign Direct Investment, Exchange RateVariability and Demand Uncertainty", NBER Working Paper , 4815

EICHENGREEN, B. (1999), "Toward a New International Financial Architecture: APractical Post-Asia Agenda" , Washington, D.C.: Institute for International Economics.

EATON, J., TAMURA, A. (1994), " Bilateralism and regionalism in Japanese and US trade anddirect foreign investment patterns ", NBER working paper 4758.

FONTAGNÉ, L., FREUDENBERG, M. (1999), "Endogenous Symmetry of Shocks in aMonetary Union", Open Economies Review, 10, (3), 263-287.

FRANKEL , J.A. (1999), "No Single Currency Regime is Right for All Countries or at AllTimes", NBER Working Paper , 7338.

FROOT, K.A., STEIN, J.C . (1991), "Exchange Rates and Foreign Direct Investment: anImperfect Capital Markets Approach", Quarterly Journal of Economics , 106, (4), 1191-1217.

GOLDBERG, L.S., KLEIN, M.W . (1997), "Foreign Direct Investment, Trade and RealExchange Rate Linkages in Southeast Asia and Latin America", NBER working paper,6344.


27

HORSTMAN, I.J., MARKUSEN, J. (1992), "Endogenous Market Structures in InternationalTrade", Journal of International Economics , 32, 109-129.

ITO , T., ISARD, P., SYMANSKY, S., BAYOUMI, T. (1996), "Exchange Rate Movements andTheir Impact on Trade and Investment in the APEC Region", chapter IV, IMF OccasionalPaper No 145, December.

KLEIN, W .M., ROSENGREN, E.S. (1994), "The Real Exchange Rate and Foreign DirectInvestment in the United States: Relative Wealth vs Relative Wage Effects, Journal ofInternational Economics, 36 (3-4) 373-389.

LIPSEY, R.E. (1999), "The Role of Foreign Direct Investment in International CapitalFlows", NBER Working Paper 7094, April.

MCKINNON, R., OHNO , K. (1997), "Dollar and Yen: Resolving Economic Conflict Betweenthe United States and Japan", MIT Press.

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STIGLITZ, J. (1999), "Reforming the Global Economic Architecture: Lessons from recentCrises", The Journal of Finance, 54 (4), 1508-1521.

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APPENDIX: THE DATA

1 – FDI stock data come from the OECD and are tabulated using mirror data statistics.Real FDI stocks series are constructed as follows, with the world consumer price indexcoming from IMF, International Financial Statistics , line 64 (100 in 1991):

=

index priceconsumer World USDmillionsin stock FDIlogFDIlog

2 – The competitiveness indicator hitC is the real exchange rate of country i against

country k (number of units of currency k needed to buy a unit of currency i). It is takenfrom the CHELEM data-base (CEPII).

3 – The volatility kitVolS is the coefficient of variation (in %) of the quarterly nominal

exchange rate of country i against country k, during the three years preceding year t.Source: IMF, International Financial Statistics, line rf.

4 – The coefficient of correlation between i/k and the rest of emerging countries/kexchange rates. The exchange rate between the emerging countries (j) and the investingcountry k is an effective, quarterly, nominal exchange rate of j against k, where eachemerging country exchange rate is weighted by the GDP of this country in the total GDP ofemerging countries (source : IMF, International financial statistics , line rf for nominalexchange rates and line 99 for GDPs).

5 – The competitiveness of emerging countries against k is computed using the CHELEMdata-base on real exchange rates. It is a real, effective, annual exchange rate, where eachemerging country exchange rate is weighted by the GDP of this country in the total GDP ofemerging countries. GDP data come from IMF, International Financial Statistics , line 99.

6 – Distance data are constructed as follows : kiDIST is the distance between i and k

when i and k have no common border. kiDIST is set to one when i and k share a common

border. Data were provided by M. Pajot.

7 – Openness . Openness relates the sum of total exports and imports of country i, to theGDP of country i (source : IMF, International Financial Statistics for the GDP, Directionof Trade for exports and imports).


29

LIST OF THE WORKING PAPERS RELEASED BY THE CEPII20

1999

"Groupes d'échanges et de réflexions sur la Caspienne", recueil des comptes-rendus deréunion (de décembre 1997 à octobre 1998), CEPII – Ministère des Affaires Etrangères.Textes réunis par Dominique Pianelli et Georges Sokoloff. Document de travail 99-15,décembre.

"The Impact of Foreign Exchange Interventions: New Evidence from FIGARCHEstimations", Michel Beine, Agnès Bénassy-Quéré, Christelle Lecourt, document detravail n°99-14, septembre.

Forum Economique Franco-Allemand, Deutsch-Französisches WirtschaftspolitischesForum , "Reduction of Working Time/Eastward Enlargement of the European Union, 5th

meeting, Paris, July 6-7, 1999, document de travail n°99-13, septembre .

"A Lender of Last Resort for Europe", Michel Aglietta, document de travail n°99-12,septembre.

"La diversité des marchés du travail en Europe : Quelles conséquences pour l'UnionMonétaire", deuxième partie : Les implications macro-économiques de la diversité desmarchés du travail, Loïc Cadiou, Stéphanie Guichard, Mathilde Maurel, document detravail n°99-11, juin.

"La diversité des marchés du travail en Europe : Quelles conséquences pour l'UnionMonétaire", première partie : La diversité des marchés du travail dans les pays de l'UnionEuropéenne, Loïc Cadiou, Stéphanie Guichard, document de travail n°99-10, juin.

"The Role of External Variables in the Chinese Economy", Stéphane Dées, document detravail n°99-09, juin.

"Hautes technologies et échelles de qualité : de fortes asymétries en Europe", LionelFontagné, Michael Freudenberg, Deniz Unal-Kesenci, document de travail n°99-08, juin.

"The Role of Capital Accumultion, Adjustment and Strucural Change for Economic Take–Off: Empirical Evidence from Africa Growth Episodes", Jean-Claude Berthélemy et L.Söderling, document de travail n°99-07, avril.

"Enterprise Adjustment and the Role of Bank Credit in Russia: Evidence from a 420Firm's Quality Survey", Sophie Brana, Mathilde Maurel, Jérôme Sgard, document detravail n° 99-06, avril.

"Central and Eastern European Countries in the International Division of Labour inEurope", Mickaël Freudenberg et Françoise Lemoine, document de travail n° 99-05, avril.

20 Working papers are circulated free of charge as stocks are available ; thank you to send your request to CEPII,Sylvie Hurion, 9, rue Georges Pitard, 75015 Paris, or by fax 33 01 53 68 55 03 or by e-mail :[email protected]. CEPII is also on the Web : http://www.cepii.fr.


30

Forum Economique Franco-Allemand/Deutsch-Französisches WirtschaftspolitischesForum, "Economy Policy Coordination and Financial Supervision in the EMU", 4th

meeting, Bonn, January 11-12 1999, document de travail n°99-04, avril.

"Models of Exchange Rate Expectations: Heterogeneous Evidence from Panel Data",Agnès Bénassy-Quéré, Sophie Larribeau, Ronald McDonald, document de travail n°99-03, avril.

Forum Economique Franco-Allemand/Deutsch-Französisches WirtschaftspolitischesForum, "Labour Market & Tax Policy in the EMU", Paris, July 6-7 1998, document detravail n°99-02, mars.

"Programme de travail 1999", Jean-Claude Berthélemy, document de travail n°99-01,janvier.

1998

"Rapport d'activité 1998", Jean-Claude Berthélemy, document de travail n°98-15,décembre.

"Monetary Policy under a Fixed Exchange Rate Regime, The case of France" BenoîtMojon, document de travail n° 98-14,décembre.

"Wages and unemployment : trade-off under different labour market paradigms" OlivierBontout et Sébastien Jean, document de travail n°98-13 , décembre .

"Structures financières et transmission de politique monétaire. Applications à l’Allemagne,la France, l’Italie et le Royaume Uni" Benoît Mojon, document de travail n°98-12, octobre .

"Le marché du travail britannique vu par la France" Michel Fouquin, Sébastien Jean, AudeSztulman, document de travail n°98-11, octobre.

"Compétitivité de régime de change en Europe Centrale", Michel Aglietta, CamilleBaulant, Virginie Coudert, document de travail n°98-10, octobre.

"Sensibilité des salaires relatifs aux chocs exogènes de commerce international et deprogrès technique : une élévation d’équilibre général", Sébastien Jean et Olivier Bontout,document de travail n°98-09, septembre .

"Evolution sur longue période de l’intensité énergétique", Pierre Villa, document de travailn°98-08, septembre.

"Sacrifice Ratios in Europe: a Comparison", Laurence Boone, Benoît Mojon, document detravail n°98-07, août.

"La politique japonaise et la crise monétaire", Stéphanie Guichard, document de travailn°98-06, juillet.


31

"La régionalisation du commerce international : une évaluation par les intensités relativesbilatérales", Michaël Freudenberg, Guillaume Gaulier, Deniz Ünal Kesenci, document detravail n°98-05, août.

"Pegging the ceec’s currencies of the euro", Agnès Bénassy-Quéré et Amina Lahrèche-Révil, document de travail n°98-04, juillet.

"The international role of the euro", Agnès Bénassy-Quéré, Benoît Mojon, Armand-DenisSchor, document de travail n°98-03, mars.

"EMU and Transatlantic Exchange Rate Stability", A. Bénassy Quéré et B. Mojon,document de travail n°98-02, avril. (épuisé).

"Programme de travail 1998", Jean-Claude Berthélemy, document de travail n°98-01 , avril.

1997

"Why the Euro Will Be Strong : an Approach Based on Equilibrium Exchange Rates",Michel Aglietta, Camille Baulant, Virginie Coudert, document de travail n°97-18,décembre.

"How foreing Direct Investment Affects International Trade and Competitiveness. AnEmppirical Assessment", Lionel Fontagné, Mickaël Pajot, document de travail n°97-17,décembre.

"Cycles de production industrielle : une analyse historique dans le domaine desfréquences", Pierre Villa document de travail n°97-16 , novembre.

"International and External Policy Coordination: a Dynamic Analysis", Fabrice Capoën,Pierre Villa, document de travail n°97-15, octobre.

"Optimal Pegs for Asian Currencies’", Agnès Bénassy-Quéré, document de travail n°97-14 ,octobre.

"Pour ou contre le système commun de TVA?", Stéphanie Guichard, Claire Lefèbvre,document de travail n°97-13, juin.

"The Euro and Exchange Rate Stability", Agnès Bénassy-Quéré, B. Mojon, Jean Pisani-Ferry, document de travail n°97-12, juin.

Estimation du cycle à l'aide d'un modèle à tendance stochastique et application au cas duRoyaume-Uni", Laurence Boone, document de travail n°97-11, juin.

"Looking for French Monetary Policy", Benoît Mojon, document de travail n° 97-10, juin.

"Incertitude sur le choix du modèle et rationalité", Pierre Villa, document de travail n° 97-09, mai.


32

"Quel est l'impact du commerce extérieur sur la productivité et l'emploi ?", Olivier Cortes,Sébastien Jean, document de travail n° 97-08, avril

"Trade Patterns Inside the Single Market" Lionel Fontagné, Michael Frendenberg &Nicolas Péridy, document de travail n° 97-07, avril.

"The Exchange Rate Policy of the Euro: A Matter of Size", Philippe Martin, document detravail n° 97-06, avril. (épuisé)

"Ces taux de change réels qui bifurquent", Pierre Villa, document de travail n° 97-05, avril.

"Chômage non-qualifié et imitation : les raisons d'un accord international sur la propriétéintellectuelle", Lionel Fontagné & Jean-Louis Guérin, document de travail n° 97-04, mars.

Symmetry and Asymmetry of Supply and Demand Shocks in the European Union aDynamic Analysis", Laurence Boone, document de travail n° 97-03, février. (épuisé)

"Interest Rates in East Asian Countries: Internal Financial Structures and InternationalLinkages", Isabelle Bensidoun, Virginie Coudert et Laurence Nayman, document de travailn° 97-02, janvier. (épuisé)

"Intra-Industry Trade: Methodological Issues Reconsidered", Lionel Fontagné, Michael Freudenberg,document de travail n° 97-01, janvier. (épuisé)

1996

"The Cost of Fiscal Retrenchment Revisited: How Strong is the Evidence?",Philippine Cour, Eric Dubois, Selma Mahfouz & Jean Pisani-Ferry, document de travailn° 96-16, décembre.

"Les dynamiques sectorielles de la croissance en Europe centrale", Françoise Lemoine,document de travail 96-15, décembre.

"Growth and Agglomeration", Philippe Martin & Gianmarco I.P. Ottaviano, document detravail n° 96-14, décembre.

"La coordination interne et externe des politiques économiques : une analysee dynamique",Fabrice Capoen et Pierre Villa, document de travail n° 96-13, décembre. (épuisé)

"L'intégration asymétrique au sein du continent américain : un essai de modélisation",Philippine Cour et Frédéric Rupprecht, document de travail n° 96-12, octobre.

"Croissance et contrainte financière dans les PED", Pierre Villa, document de travail n° 96-11, octobre.

"Bulgaria From Entreprise Indiscipline to Financial Crisis", Roumen Avramov et JérômeSgard, document de travail n° 96-10, juillet.


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"Potentialities and Opportunities of the Euro as an International Currency", Agnès Bénassy-Quéré, document de travail n° 96-09, août. (épuisé)

"Credit Crisis and the Role of Banks During Transition: a Five-Country Comparison",Jérôme Sgard, document de travail n° 96-08, août.

"Exchange Rate Regimes and Policies in Asia", Agnès Bénassy-Quéré, document de travailn° 96-07, juillet.

"France in the Early Depression of the Thirties", Pierre Villa, document de travail n° 96-06,juillet.

"Pays émergents, emploi defficient ?", Olivier Cortès et Sébastien Jean, document detravail n° 96-05, mars.

"Trade with Emerging Countries and the Labor Market : the French Case", Olivier Cortès,Sébastien Jean et Jean Pisani-Ferry, document de travail n° 96-04, mars.

"The Transmission of Monetary policy in the European Countries", Fernando Barran,Virginie Coudert et Benoit Mojon, document de travail n° 96-03 , février. (épuisé)

"Trade Policy and Trade Patterns During Transition : A Comparison Between China andCEECs", Françoise Lemoine, document de travail n° 96-02, février.

"Financial Markets Failures and Systemic Risk", Michel Aglietta, document de travailn° 96-01, janvier

1995

"Why NAFTA Might be Discriminatory", Lionel Fontagné, document de travail n° 95-12 ,décembre. (épuisé)

"Régionalisation et échanges de biens intermédiaires", Lionel Fontagné, MichaelFreudenberg et Deniz Ünal-Kesenci, document de travail n° 95-11 , décembre.

"The Geography of Multi-speed Europe", Philippe Martin et Gianmarco I.P Ottaviono,document de travail n° 95-10 , novembre.

"The Political Economy of French Policy and the Transmission to EMU", Christian deBoissieu et Jean Pisani-Ferry, document de travail n° 95-09 , octobre (épuisé).

"L'importance des exclus de l'intégration monétaire en Europe", Philippe Martin, documentde travail n° 95-08, novembre.

"Asymétries financières en Europe et transmission de la politique monétaire", VirginieCoudert et Benoit Mojon, document de travail n° 95-07, septembre (épuisé).

"La mesure du capital éducatif", Pierre villa, document de travail n° 95-06, septembre.


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"Capital humain, mobilité des capitaux et commerce international", Pierre Villa, documentde travail n° 95-05, juin.

"L'Europe à géométrie variable : une analyse économique", Jean Pisani-Ferry, document detravail n° 95-04, avril. (épuisé)

"Comparaison de l’efficacité énergétique des pays d’Europe centrale et orientale avec celledes pays de l’OCDE", Nina Kounetzoff, document de travail n° 95-03, mars.

"L'organisation de la politique économique dans un cadre stratégique", Pierre Villa,document de travail n °95-02, mars.

"Interest Rates, Banking, Spreads and Credit Supply: The Real Effects", Fernando Barran,Virginie Coudert, Benoît Mojon, document de travail n° 95-01, mars. (épuisé)

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