The Impact of Inflation Targeting on Attracting Foreign Direct Investment

Abstract

This study investigates if nations adopting the inflation targeting monetary policy are more successful in attracting FDI than nations utilizing alternative monetary policies. Subsequently, we inquire if inflation targeting is more successful for developing or developed nations. Our results provide four contributions to inflation targeting literature: (i) inflation targeting has a positive impact on attracting FDI; (ii) the attraction is stronger for developed nations than for developing nations; (iii) the attraction is stronger for lower-middle income developing nations than for upper-middle income developing nations; (iv) the relationship between FDI and imports/exports is that of a substitute, not of a compliment.