This paper investigates the determinants of FDI inflows to emerging market economies, concentrating on the effects of economic policies. The empirical analysis also addresses the role of external push factors and of political stability using a domestic conflict events database. The results suggest that lowering corporate tax rates and trade tariffs, adopting fixed or managed exchange rate policies and eliminating FDI related capital controls have played an important role. Domestic conflict events and political instability are found to have significant negative effects on FDI, which highlights the role of incluside policies to promote growth and avoid sudden stops of FDI inflows.
We develop new economic policy uncertainty (EPU) indices for Japan from January 1987 onwards building on the approach of Baker, Bloom and Davis (2016). Each index reflects the frequency of newspaper articles that contain certain terms pertaining to the economy, policy matters and uncertainty. Our overall EPU index co-varies positively with implied volatilities for Japanese equities, exchange rates and interest rates and with a survey-based measure of political uncertainty. The EPU index rises around contested national elections and major leadership transitions in Japan, during the Asian Financial Crisis and in reaction to the Lehman Brothers failure, U.S. debt downgrade in 2011, Brexit referendum, and Japan's recent decision to defer a consumption tax hike. Our uncertainty indices for fiscal, monetary, trade and exchange rate policy co-vary positively but also display distinct dynamics. VAR models imply that upward EPU innovations foreshadow deteriorations in Japan's macroeconomic performance, as reflected by impulse response functions for investment, employment and output. Our study adds to evidence that credible policy plans and strong policy frameworks can favorably influence macroeconomic performance by, in part, reducing policy uncertainty. JEL Classification Numbers: D80, E20, E52, E62, F13
for very useful comments and suggestions and Yihan Liu for excellent research assistance. We are especially grateful to Ikuo Saito, who was a coauthor on an earlier draft. Steven J. Davis gratefully acknowledges financial support from the U.S. National Science Foundation and the Booth School of Business at the University of Chicago. The views expressed in this paper are those of the author(s) and do not necessarily represent the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.
Fiscal transparency can provide policymakers with incentives to adopt better policies by enhancing the public debate on the design and sustainability of fiscal policy and establishing accountability for their implementation. Fiscal transparency can also reduce uncertainty about fiscal policy and fiscal outturns by providing more information on the underlying fiscal position and fiscal risks. Both effects suggest that countries should benefit from adopting transparency enhancing policies through better market assessments of their sovereign risk. In this paper, we investigate whether fiscal transparency has an effect on market perceptions of sovereign risk, as measured by sovereign credit ratings, and if so, through which channels. We find that fiscal transparency has a positive and significant effect on ratings -one standard deviation increase in fiscal transparency increases credit ratings by 0.7 and 1 notches (or steps in the credit rating scale) in advanced and developing economies, respectivelybut its effect works through different channels in advanced and developing economies. In advanced economies, fiscal transparency is associated with better fiscal outcomes, leading indirectly to higher credit ratings. In developing * Submitted February 2013.The views expressed in this paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. The authors would like to thank Xavier Debrun, Michael Keen, Jon Shields, the editor and an anonymous referee for their insightful comments; Farhan Hameed for generously sharing his fiscal transparency index estimate; and Tafadzwa Mahlanganise for excellent research assistance.
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