Foreign investment and real exchange rate volatility in emerging Asian countries

Abstract

This study asks whether greater foreign investment reduces real exchange rate volatility in eight emerging Asian countries. As a noteworthy aspect, we utilize detailed measures of foreign investment, including foreign direct investment, foreign portfolio equity, and foreign debt. Our findings from both time-series and panel data for the period 1980–2011 indicate that greater stocks of foreign liabilities reduced real exchange rate volatility for China, India, Malaysia, Singapore, and South Korea but increased real exchange rate volatility for Indonesia, the Philippines, and Thailand. We further examine the effects of several important factors on real exchange rate volatility for the two groups of countries separately.