EXCHANGE RATE REGIME CHOICE, SIGNALING AND FDI INFLOW IN DEVELOPING COUNTRIES

Abstract

This dissertation represents an effort to account for the choice of exchange rate regimes among developing countries in the post-Bretton Woods period. I argue that in an era of globalization with capital mobility, governments of developing countries deliberately use a flexible exchange rate regime as a signal of their capabilities of economic stabilization to international investors. The signaling theory of exchange rate regime choice is formally illustrated using a game theoretic model. The central hypothesis is tested quantitatively using a panel of 127 developing countries and 22 developed countries from 1974 to 2004. To test the mediation effect of exchange rate regime, I follow the procedure suggested by Baron and Kenny (1986) for statistical mediation analysis. Overall, the empirical analysis shows that countries with greater economic stability tend to attract more FDI and such an effect is mediated by the choice of a flexible exchange rate regime.