| This dissertation is composed of two chapters. Chapter one examines quarterly nominal US dollar exchange rates for ten industrialized countries for the period 1973–1994. The estimates are consistent with convergence of the exchange rate towards its purchasing power parity (PPP) equilibrium. However, the estimated coefficients imply slow exchange rate convergence. Indeed, there is agreement in the extant literature that nominal exchange rates, price levels, and even relative price levels have each a unit root component. The presence of cointegration among the series is established through an error correction mechanism. Chapter two examines panel data from developing countries to examine the effects on Foreign Direct Investment (FDI) of real exchange rate movements, controlling for other host country (and time varying) factors, including corporate tax rates, tariff rates, the degree of openness to international capital flows, contract enforcement, nationalization risk, and corruption. We find that a real appreciation of the host country currency results in reduced FDI inflows. Moreover, we find that, for the countries in our sample, the importance of FDI-promoting policies implemented by host countries diminishes after the real exchange rate is included in the specification. |
