The “Euro Effect” and Outward Foreign Direct Investment

The “euro effect” is an important phenomenon in the debate on monetary integration results in Europe. While in the existing literature the impact of the euro adoption is usually studied on trade data, the main goal of the paper is to examine whether the “euro effect” can be detected in Outward Foreign Direct Investment flows from the OECD countries. Using the difference-in-differences method and the gravity equation corrected for the sample selection and firm-heterogeneity biases, we investigate the trends of the strength of the impact of the euro over the 1985-2012 period. Our results suggest that the influence is positive, is not time invariant and does not display a clear trend. It was the strongest in the years 2003-2005 and 2010-2011. The impact faded in the years 2006-2007, and the euro was insignificant shortly after its introduction and during the global financial crisis.
Michał Brzozowski and Grzegorz Tchorek
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