Foreign Direct Investment and Real Exchange Rate: A Causality Analysis

This paper empirically investigates the direction of a causal relationship between exchange rates and foreign direct investment (FDI) flows using quarterly data from Turkey for the period 1987-2000, by means of Granger non-causality testing procedure developed by Toda and Yamamoto (1995). The results indicate that Granger causality is unidirectional and is running from FDI to real effective exchange rates. The results of this article generally agree with the predictions by the portfolio model according to which financial and capital liberalization in Turkey leads to an increase in capital inflows, which in turn, a real exchange rate appreciation.