Output Losses Caused from Fluctuation of Foreign Direct Investment and Financial Crises in Emerging Market Countries

In this study, while the theoretical and empirical backgrounds related to foreign direct investment (FDI) and its fluctuation including Sudden Flood and Sudden Stops have been expressed; the interaction between these phenomena and the deviations of the output from its long-run trend as a proxy for the output losses has been evaluated with emphasizing on financial crises. Also, the role of macroeconomic variables and policies will be considered to reduce these fluctuations and losses. The used econometric model is a simultaneous equations model with a discrete dependent variable in panel data for the selected emerging market countries during 1990-2014. The results have shown the positive and negative effects of sudden flood and sudden stops on the output, respectively. Also, the deviations of the output have had a significant and consistent with theoretical expectations effect on these phenomena and the role of financial crises in each of the equations has been significant. Furthermore, the role of macroeconomic policies is important in this regard and the output losses can be controlled by using active monetary and exchange rate polices.