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Does Inflation Targeting Matter for Attracting Foreign Direct Investment into Developing Countries?

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Abstract

This paper investigates the effect of Inflation Targeting (IT) on Foreign Direct Investment (FDI). Based on panel data of 53 developing countries over the period 1980-2007, this study is the first, to the best of the author’s knowledge, to evaluate directly the effect of IT on FDI. Using a variety of propensity scores-matching methods which allow controlling for selfselection in policy adoption, it finds that the treatment effect of IT on FDI is positive, statistically significant and robust to a set of alternative specifications. In terms of policy recommendations, this finding therefore suggests that if well implemented, IT adoption can be a legitimate part of the policy toolkit available to policymakers in developing countries in their competition to attract more FDI.

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