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THE ROLE OF US-BASED FDI FLOWS FOR GLOBAL OUTPUT DYNAMICS

Published online by Cambridge University Press:  27 July 2017

Florian Huber ,
Manfred M. Fischer  and
Philipp Piribauer
Florian Huber
Affiliation:
Vienna University of Economics and Business
Manfred M. Fischer*
Affiliation:
Vienna University of Economics and Business
Philipp Piribauer
Affiliation:
Vienna University of Economics and Business and Austrian Institute of Economic Research (WIFO)
*
Address correspondence to: Manfred M. Fischer, Vienna University of Economics and Business, Welthandelsplatz 1, Building D4, 1020 Vienna, Austria; e-mail: [email protected].
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Abstract

This paper uses a global vector autoregressive (GVAR) model to analyze the relationship between foreign direct investment (FDI) inflows and output dynamics in a multicountry 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:Q1–2012: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 gross domestic product fluctuations, especially in emerging market economies.

Keywords

FDI-Output RelationshipCross-Country SpilloversTransmission of External ShocksBayesian Global Vector Autoregressive Model
Type
Articles
Information
Macroeconomic Dynamics , Volume 23 , Issue 3 , April 2019 , pp. 943 - 973
Copyright
Copyright © Cambridge University Press 2017 

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Footnotes

The authors gratefully acknowledge financial support from the Austrian National Bank, Jubiläumsfond grant no. 16249. We are indebted to Benedikt Sargant for excellent research support.

References

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