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Department of Economics Working Papers,
Vienna University of Economics and Business, Department of Economics

The role of US based FDI flows for global output dynamics

Florian Huber (), Manfred M. Fischer () and Philipp Piribauer ()
Additional contact information
Florian Huber: Department of Economics, Vienna University of Economics and Business
Manfred M. Fischer: Department of SocioEconomics, Vienna University of Economics and Business
Philipp Piribauer: Oesterreichisches Institut für Wirtschaftsforschung

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.

Keywords: FDI-output relationship, cross-country spillovers, transmission of external shocks, Bayesian global vectorautoregressive model

JEL-codes: C30; E52; F41; E32 February 2017

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