Factors Affecting Exchange Rate Variability in Sri Lanka: An Autoregressive Distributed Lag Approach

The purpose of this study is to analyze the causal relationship (causality) of foreign direct investment (FDI) to gross domestic product (GDP) growth in ASEAN-5 and to determine the long-term relationship (cointegration) of foreign direct investment to gross domestic product growth in ASEAN. ASEAN-5. This research uses a quantitative approach in the form of causal associative conducted in ASEAN-5, namely Indonesia, Malaysia, Singapore, Thailand and the Philippines. The types of data used are quantitative data and qualitative data, and the data sources used are secondary data from the World Bank over a period of thirteen years, namely, the 2007-2019 period in countries that are members of ASEAN-5. The data collection method used is non-participant observation. The analysis technique used is pedroni cointegration test and Granger causality. The results of the analysis in this study indicate that there is a one-way relationship between Foreign Direct Investment (FDI) and Gross Domestic Product (GDP) growth in ASEAN-5, and there is a long-term relationship between Foreign Direct Investment (FDI) and Gross Domestic Product growth (GDP) in ASEAN-5.

This study investigates the short and long run effect of diverse sources of macroeconomic instability on the inflow of foreign direct investment (FDI). The stability of the business environment of a host country will determine the extent to which these economies will absorb shocks and make the economy attractive to foreign investors. We evaluate the role played by macroeconomic instability conditions in determining the inflow of FDI in Sub-Saharan African (SSA) economies, where FDI inflow have been relatively low and macroeconomic instability variables like inflation, external debt and exchange rate has persistently shown volatile trends as compared to other regions in the world. This study employs the Pooled Mean Group (PMG), Mean Group (MG) and Dynamic fixed effect (DFE) autoregressive distributive lag (ARDL) estimation approaches which account for both non-stationarity and heterogeneity effects, in a panel of 31 SSA countries and covers the period 1990 to 2017. We equally employ first and second generation panel unit root test, cross sectional dependence test and cointegration test. The Hausman test is used to select the most efficient estimation technique between the MG, PMG and DFE techniques. The results reveal a negative but insignificant effect of inflation on FDI both in the short and long run. Equally, a positive but insignificant effect of external debt and a negative but insignificant effect of exchange rate are observed in the short run. In the long run, external debt significantly crowds out FDI while exchange rate significantly crowds in FDI in the sub-Saharan African sub region. Based on the findings, we recommend that debt contracted in the sub region should be channeled to productive use like road infrastructure and renewable energy, while currency depreciation should be encouraged in order to render investors within this region more competitive. The used of monetary and fiscal policies should be employed to tackle macroeconomic uncertainty. Capital account regulation should equally be adopted to ensure a competitive real exchange rate. Equally, the debt carrying capacity of each economy should be identified in order to avoid debt unsustainability or payment and servicing default.

In this chapter, a comparative and rigorous analysis of how changes in the Real Effective Exchange Rate (REER) affect three macroeconomic variables which include Gross Domestic Product (GDP) growth, agricultural exports, and Foreign Direct Investment (FDI) in Pakistan, India, and China is made. The states mentioned above, although geographically close to each other and of importance to the global economy as a block, are quite different in terms of institutional frameworks, exchange-hate regimes, structural composition and policy autonomy, thus, creating quite different transmission mechanisms of REER. The country is typified by endemic structural weaknesses in its three main forms, a small export base, overdependence on imported energy as well as insufficient fiscal cushions, that increase its susceptibility to REER misalignments. Empirical studies show that REER overvaluation reduces long-term growth in GDP by reducing the competitiveness of exports but gains on depreciation are often immediately offset by imported inflation that often exceeds 20 per cent in crisis. Agricultural exports which make up close to a quarter of GDP and half of the labour force are acutely sensitive to real appreciation; a 1 per cent appreciation of the REER will reduce the volumes of exports by 0.6-0.9 per cent with the effect lasting more than two years due to asymmetric adjustment processes. Moreover, REER volatility discourages FDI inflows that stand at a modest US$ 23 billion a year on average because investors face increased macroeconomic uncertainty especially in capital intensive industries, thus putting at risk strategic programmes like the China-Pakistan Economic Corridor (CPEC). By contrast, China takes advantage of its institutional strength, vast foreign -exchange holdings (above US 3 trillion), and a state -based economic system to transform the REER into a policy instrument. The people bank of China plays a crucial role in the changes of the exchange rates to maintain the export-led growth without destabilizing inflation and moderate depreciation to help boost the industrial production in the coastal provinces and protect the agricultural sector with subsidies and strategic reserves. The shift of China towards high-value agricultural exports and the use of currency swap agreements as a part of the Belt and Road Initiative is an additional step of China to shelter its external sector against REER volatility. As a result, China becomes the leading destination of FDI in the developing economies where it receives more than US180 billion every year as it takes the exchange-rate policy and integrates it with infrastructure construction and technology modernization to create a virtuous cycle of competitiveness and integration. India holds an intermediate position, which is typified by an exchange rate regime that is market driven. Dominating regime structure, democratic form of governance and dualistic economy. Although, the Balassa-Samuelson effect has led to the loss of cost competitiveness in labor-intensive production, and hampered the program of Make in India, the moderate depreciation has a positive effect on agriculture output by increasing rural incomes. Exporting agricultural products, however, is vulnerable to the fluctuations of the currency (Increasing by 0.7 per cent of exports of rice with a single per cent appreciation of the REER), and farmers who are not hedged are especially vulnerable; value-added processing is slowly making agricultural products more resilient in that regard. The inflows of foreign direct investment (FDI) of about US 60-80 billion a year are bifurcated market seeking investment in services is relatively insensitive to the fluctuations in exchange rate, and export-platform FDI is deterred by exchange-rate volatility. The larger domestic marketplace as well as the diversification of energy inherent in India gives it some cushion against imported inflation.

This paper investigates the determinants of Sudan balance of payments using annual data on Balance Of Payments (BOP), foreign debt (ED), Exchange Rate (EX), inflation (INF), Gross Domestic Product (GDP) during the period (1980 - 2016). The paper elaborates the problem regarding the impact of foreign debt on the balance of payments. The paper built on the fundamental assumption that the foreign debt linked to a positive relationship with the balance of payments by running VECM Approach. Results of the study indicate that there is a direct correlation between the balance of payments and foreign debt, and an inverse relationship between the balance of payments and all of the inflation, gross domestic product and exchange rate during the fore mentioned period. The paper recommends that Sudan should not totally depends on foreign aid in solving its economic problems which entails to transfer big amount of the national product to meet the commitments towards those foreign countries, the need for coordination between macroeconomic policies and domestic economic policies in order to increase output domestic product, economic policies are functioning to reduce the ratio of foreign debt and the reduction of inflation and bring about stability in the exchange rate which leads to improving the balance of payments to be adopted by Sudan.

Foreign Direct Investment (FDI) can bring in much needed capital, particularly in emerging markets, help improve manufacturing and trade sectors, bring in more efficient technologies, increase local production and exports, create jobs and develop local skills, bring about improvements in soft and hard infrastructure and overall be a contributor to sustainable economic growth in the Gross Domestic Product (GDP). With all these desirable features, it becomes relevant to ascertain the factors which attract FDI to an economy or a group of adjacent economies. This paper explores the determinants of FDI in six Former Soviet Union (FSU): Ukraine, Belarus, Armenia, Russia, Moldova and Kazakhstan. After an extensive literature review of theories and empirical research and using a set of cross-sectional data over the period 1995–2017, an ARDL model is estimated with FDI/GDP as the dependent variable. Inflation, exchange rate changes, openness, economy size (GDP), Income levels (GNI per capita), Infrastructure (measured by the number of fixed line and mobile subscription per 100 persons) are tested as independent variables for explanatory power in long run and short run relationships. Over the period, higher inflows of FDI in relation to GDP appear to be have been attracted to the markets with better infrastructure, smaller markets and higher income levels, with lower openness, depreciation in the exchange rate and higher income levels though the coefficients of the last three variables are not significant. The results show the type of FDI attracted to investments in this region and are evaluated from theoretical and practical view points. Policy recommendations are made to enhance FDI inflows and further economic development in this region. Such a study of this region has not been made in the past. JEL: C21, F21, F23.

The purpose of this study is to analyze the causal relationship of external debt and balance of payment with foreign direct investment (FDI) in Bangladesh for the period of 1980 to 2017 through the application of Johansen Cointegration technique, Vector Error Correction Model (VECM), and Granger Causality approach. Results of cointegration and VECM indicate a significant long-run relationship between dependent (FDI) and independent variables (external debt and balance of payment). External debt is found to have a significant negative impact on FDI in the long-run, but it is found insignificant in the short-run. In contrast, the balance of payment has a significant positive effect on FDI both in the long-run and short-run. Results of the Granger causality test reveal that there exists bidirectional short-run causality between the balance of payment and FDI; that is, both the balance of payment and FDI affect each other. But no unidirectional or bidirectional short-run causality is found between external debt and FDI. Keywords: FDI, external debt, balance of payment, cointegration, VECM, causality

FDI, External Debt and Their Impact on Economic Growth of Pakistan: Empirical Evidence Using Larger Sample Size

The present study proposes to analyze the impact of the capital flows on the economic growth. The change in the capital flows affects the money supply in the economy which in return influences the economic growth. The augmented dickey fuller test (ADF), descriptive Analysis, correlation method, and the auto regressive distribution lag are employed in this work. The ADF test is delved to examine the Stationarity of the variables and the correlation between them. The descriptive analysis is used to check the normality of the variable whether the variables is normally distributed or not. The survey bases on time series data ranging from the year 1974 to 2014. The variables as the gross domestic product (GDP), exchange rate (ER), inflation (INF), consumer price index (CPI), money supply (M2), total reserves (TR) and the foreign direct investment (FDI), price indices (PI). The research findings are Foreign direct investment, Exchange rate, Inflation rate, Consumer Price Index has the positive impact on the GDP while the Private Investment, Total reserves, and Money supply have the negative impact on the GDP. The value of the R square is 0.99874 which is very good. It means that the 99 percent variations exist in dependent variable due to independent variables.

The purpose of this paper is to analyse the impact of Foreign Direct Investment (FDI), Exchange Rate (EXR) and Consumer Price Inflation (CPI) to the Gross Domestic Product (GDP) growth in Nepal. Descriptive and causal comparative research designs were used to analyse the impact of FDI, EXR and CPI on economic growth of Nepal. The study has used 17 years' annual time-series data of FDI, GDP at current price, CPI, and EXR throughout the FY 2006/07 to 2022/23 in Nepal. The empirical results found that EXR and FDI have positive and significant impact on the economic growth of Nepal whereas the adverse effect of CPI on economic growth has been found. FDI and favorable EXR appearing as key drivers of economic growth, but rising prices could slow down it.

This study analyzes the long run as well as short run linear and nonlinear impact of foreign direct investment (FDI) and exchange rate on tourism in South Asian countries. The study uses annual panel data of five South Asian countries that is Bangladesh, India, Nepal, Pakistan, and Sri Lanka from 1995 to 2019 and applies panel linear autoregressive distributive lag (ARDL) and nonlinear autoregressive distributive lag (NARDL) methodology to analyze the long run and short run relationship among the variables. Results show that an increase in FDI and appreciation of exchange rate contracts tourism, while a decrease in FDI and depreciation of exchange rate expands tourism in the long run. Both FDI and exchange rate shows asymmetric behavior with tourism in the long run in South Asian countries. Results of individual countries show that FDI has asymmetric impact on tourism in Bangladesh, India, Pakistan, and Sri Lanka in the short run, while exchange rate has asymmetric impact on tourism in Bangladesh, India, Nepal, and Pakistan in the short run. Moreover, unidirectional causality exits from FDI, exchange rate, partial negative sum of FDI, and partial positive sum of exchange rate to tourism as well as from tourism to partial positive sum of FDI and partial negative sum of exchange rate. Therefore, there is a need to expand tourism sector through attracting FDI in tourism sector, while FDI attraction and tourism development must be well coordinated among different departments as well as maintain exchange rate at a reasonable level to encourage international tourism.

This study's main goal is to determine the effect that specific macroeconomic factors have on the amount of foreign direct investment (FDI) flowing into Nigeria. The ex post facto research design was adopted, and it used exchange rate, inflation rate, monetary policy rate (MPR), and gross domestic product growth (GDP) rate as the macroeconomic variables. The quantity of inflow between 1986 and 2020 was made up of FDI (dependent variable). Because the model variables were integrated in a mixed order of both level and first difference, the autoregressive distributed lag (ARDL) technique was used. The selected macroeconomic variables and FDI were bound by a long-run connection, according to the results of the ARDL bounds test for cointegration. The calculated short-run coefficients showed that GDP growth rate and monetary policy rate were the primary macroeconomic variables that considerably increased FDI inflow in Nigeria, whereas inflation and exchange rate were the major macroeconomic variables that significantly decreased FDI inflow. In the long term, the GDP growth rate and the exchange rate had a beneficial influence on FDI influx, whereas the monetary policy rate had a large negative effect. According to these empirical findings, it is advised that Nigeria's monetary authorities should support strong GDP growth, exchange rate stability, and efficient monetary policy rates in order to draw FDI into the country and create efficient foreign exchange policies that will attract foreign investors.

Foreign direct investment has seen increasing interest worldwide, especially in developing economies. However, statistics have shown that Yemen received fluctuating FDI inflows during the period under study. Against this background, this research seeks to determine the relationship and impact of interest rates on FDI flows. The study also found other determinants that greatly affected FDI inflows in Yemen for the period 1990-2018. Study data collected from the World Bank and International Monetary Fund databases. It also ensured that the time series were made balanced and interconnected, and then the Auto Regressive Distributed Lag method used in the analysis. The results showed that the interest rates and inflation rate harmed FDI flows and, therefore, could not be used for policymaking purposes. The research also discovered that GDP growth and trade openness are the main determinants of foreign direct investment in Yemen. Trade openness policies should be encouraged, and GDP growth facilitated if the economy is to achieve long-term FDI flows.
 Purpose –The purpose of the paper is to discover the impact of interest rate on foreign direct investment with a combination of the exchange rate, inflation, gross domestic product, and trade openness.
 Design/methodology/approach – The paper implements the Auto Regressive Distributed Lag (ARDL)-Bounds testing approach to analyze maintaining the time series properties in terms of stationarity.
 Findings – The results indicate that there is a long-run equilibrium between the Foreign Direct Investment and the explanatory variables. Furthermore, the significant factors influencing, positively, FDI in Yemen are Growth domestic product, Exchange rate, and Trade openness. In contrast, both the Interest rate and Inflation rate have a substantial negative impact on Foreign Direct Investment.
 Practical implications – Policymakers in Yemen advised reconsidering many of the general state policies, including investment policies, financial and administrative governance, and monetary policy that focuses on maintaining an adequate interest rate and reduce the rate of inflation.
 Originality/value – As for the case of Yemen, this the first study empirically explores the impact of interest rate and the foreign direct investment using the Auto Regressive Distributed Lag method aiming for more reliable results.

Mohan (2008) presents a comprehensive review of the macroeconomic policy developments in India over the past four decades with a particular emphasis on the last two decades. India transformed from a tightly controlled socialistic economy to one of the emerging market economies with accelerating growth. Before the transformation, the Indian economy was characterized by many regulations and controls, the nationalization of banks, and fiscal deficits that were financed by the central bank. The economy was in a low growth state, and the inflation rate was high. After the transformation, fiscal deficits have been reduced, and their direct financing by the central bank is banned. Monetary policy has been geared towards achieving a low and stable inflation rate. The critical regulatory changes took place after the balance of payments crisis of 1990 ‐1991. My comments are mostly directed to the current challenges rather than to India’s historical experience. The growth acceleration from 3% in the 1960s to 1980s, to 5% in the 1990s, to 8% after 2003, as shown in Mohan’s Table 1, is impressive, but still not perfect. It is impressive because it shows steady improvement as various reforms were taking place. It does not seem perfect because, first, the growth rate did not jump to a high range, say 8 ‐10%, immediately after the critical set of reforms in the beginning of the 1990s, and, second, in the near future, the growth rate does not seem likely to climb up to the 10% level that China has been able to achieve in the last decade. Why couldn’t India achieve doubledigit growth, if China could do it? The frustration is understandable but it may be important to recall some of the other growth experiences in Asia. Japan achieved double-digit growth in the 1950s and 1960s. South Korea, Taiwan, and Singapore achieved near 10% growth in the 1980s and 1990s. They all relied upon manufactured exports and climbed up the ladder of sophistication as they grew. Sustained 10% growth was possible only because those countries enjoyed export booms and their export items went from low-tech to middle-tech, and eventually to high-tech goods, as they chased the country just ahead of them. This view is known as the flying geese pattern of Asian growth. In a sense, 10% gross domestic product (GDP) growth was helped by very high (much higher than 10%) growth in the exports of toys and shoes followed by motorcycles and TVs, and then petrochemicals, steel, and automobiles.

This study was carried out to investigate the impact of the Ethiopian exchange rate and its volatility on international trade. Trade openness was used as a proxy for international trade in the study. The study’s general objective was to investigate how international trade responds to exchange rate levels and volatility. The study relied solely on secondary time-series data spanning the years 1992 to 2019. The Autoregressive Distributive Lag (ARDL) model was used in the study to investigate the long-term relationship between exchange rate level, volatility, and international trade performance. An error correction model was used to estimate the variables in the short term. To conduct the regression analysis, Foreign Direct Investment (FDI), Gross Domestic Product (GDP), and inflation were used as control variables. The finding of the study implies that: in the short term, the exchange rate level was found to negatively and significantly influence international trade. However, exchange rate volatility positively and significantly affects international trade both in the short and in the long term. In addition, gross domestic product, foreign direct investment, and inflation have a positive effect on international trade both in the short term and long term. This finding lends support to the J-curve effects, which suggest an initial loss in the short term followed by a dramatic gain in the long term. However, the findings of this study suggest that there is no significant gain from international trade to justify currency depreciation in Ethiopia.

Vietnam, an emerging Southeast Asian economy, confronts the dual challenge of pursuing economic growth while ensuring environmental sustainability. In response to global efforts to mitigate CO 2 emissions, various governments have implemented various policies. The article aims to investigate the intricate relationship between innovation, renewable energy consumption (REC), foreign direct investment (FDI), gross domestic product (GDP), and CO 2 emissions in Vietnam. Using annual data from 2000 to 2023, we employ the Autoregressive Distributed Lag (ARDL) approach to analyze both short-term and long-term dynamics among these variables. Our empirical findings reveal that innovation and REC significantly reduce CO 2 emissions in the long run. At the same time, FDI shows a nuanced impact, promoting economic growth and contributing to higher emissions depending on the type and regulation of investments. Annual data from 2000 to 2023, obtained from Vietnam's General Statistics Office, the International Monetary Fund, and the World Bank, were utilized for this analysis. Empirical findings indicate that innovation contributes positively to carbon dioxide emissions in Vietnam, whereas REC is associated with a reduction in environmental degradation. On the other hand, both FDI inflows and economic development are significantly positively correlated with environmental pollution. The results underscore the importance of fostering innovation and expanding renewable energy to achieve sustainable economic growth. Policy implications suggest promoting clean technology, creating favorable conditions for sustainable FDI, and diversifying the economy to mitigate environmental impacts. This article explores the intricate relationships between innovation, renewable energy usage, FDI, GDP growth, and CO 2 emissions in Vietnam. By integrating empirical analysis with a review of existing literature, the article provides insights into the dynamic interactions among these variables and proposes policy recommendations for sustainable development in Vietnam. Ultimately, this research offers essential recommendations to support Vietnam in cultivating a green and sustainable economy during the Fifth Industrial Revolution era.