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Back to the future: monetary policy and the twin deficits

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  • Geoffrey M. B. Tootell

Abstract

There has been a significant correlation between inward foreign direct investment in the United States and the U.S. real exchange rate since the 1970s. Two alternative reasons for this relationship are that the real exchange rate affects the relative cost of production and that the real exchange rate alters reTative wealth across countries. In this paper we explore these alternatives by examining the determinants of four measures of inward foreign direct investment to the United States from seven industrial countries over the period 1979 to 1988. We find strong evidence that relative wealth significantly affects foreign direct investment in the United States. We find little evidence that relative wages have a significant impact on the determination of foreign direct investment in the United States. These results are robust to the choice of countries in our sample and when controlling for changes in tax codes.

Suggested Citation

  • Geoffrey M. B. Tootell, 1992. "Back to the future: monetary policy and the twin deficits," Working Papers 92-1, Federal Reserve Bank of Boston.
    • Handle: RePEc:fip:fedbwp:92-1
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    References listed on IDEAS

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    Cited by:

    1. Geoffrey M. B. Tootell, 1996. "Can studies of application denials and mortgage defaults uncover taste-based discrimination?," Working Papers 96-10, Federal Reserve Bank of Boston.

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    Keywords

    Monetary policy; Deficit financing;

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