Developing Economies Benefit the Most From Inflation Targeting for Attracting FDI

Abstract

This study investigates if developing nations implementing the inflation targeting monetary policy are more successful in attracting FDI cash flows relative to both developed nations practicing inflation targeting, as well as nations utilizing alternative monetary policies. Subsequently, we investigate based on regional-cultural clusters where inflation targeting is most successful for attracting FDI. Our results provide two primary contributions to the inflation targeting literature: (i) inflation targeting has a positive impact on attracting FDI for Lower-Middle Income nations, but not for Upper-Middle Income or High Income nations; (ii) inflation targeting is most successful in regional-cultural clusters with a larger representation of Middle Income nations rather than High Income Nations.