Relationship Between Central Bank Independence and Foreign Direct Investment Inflows

Abstract

The principal objective of this paper is to scrutinize the relationship between central bank independence and foreign direct investment (FDI) inflows. The relevance of this goal is based on the results of recent studies, which indicate that the inflow of direct investment into the economy depends not only on its indicators of economic development, but also on the quality of the institutional environment. The study used a sample of 180 countries covering the period from 1970 to 2012 to model the relationship between the level of central bank independence and inflows of foreign direct investment. The primary method used in the study is linear panel regression with country-specific fixed effects. The results of the econometric modeling demonstrate that an increase in the central bank independence index has a statistically significant positive effect on the inflow of foreign investment. This result can serve as the basis for monetary policy reforms, particularly in developing countries since the expansion of the central bank's independence can become a factor in increasing the investment attractiveness of the economy.