Asymmetric Effect of Inflation on Attracting Foreign Direct Investment in Iran

Nowadays, many countries of the world have found a strong desire to attract foreign capital due to the lack of internal resources for investment. Empirical evidence suggests that various factors affect the attraction of foreign direct investment.  Inflation as an economic factor can have a direct impact on attracting foreign direct investment. Due to the importance of this issue, the present study seeks to investigate the short-term and long-term asymmetric effects of increasing and decreasing inflation rate on foreign direct investment in Iran for the annual data for the period (1970-2016) using the Nonlinear Autoregressive Distributed Lag (NARDL) Model. The findings of this research show that in the short and long run the increasing and decreasing impacts of inflation rate have a negative and positive effect on attracting foreign direct investment, respectively. Moreover, the effects of declining inflation shocks on the increase in the attraction of foreign direct investment are more than the effects of its raising inflation shocks on reducing the attraction of foreign direct investment. The effect of other variables used in the model is that in the long run, the variables of government expenditures and tariffs have a negative effect and GDP, exchange rate (dollar exchange rate), labor-to-population ratio, and openness of the economy have a positive effect on attracting foreign direct investment. JEL Classification: F21, C130