In Section 3, causality between FDI and the real exchange rate is investigated, in accordance to the theoretical background described in theprevioussection.Finally,thelastsectionofthepaperofferssomecon- cludingremarksregardingtheinterlinkagesbetweenFDIflowsandthereal exchange rate. 1. The interlinkages between FDI and the real exchange rate Since the 1980’s the globalization and integration of economic activity has af- fected the relationship between FDI and the real exchange rate (RER). Both FDI and RER movements have become endogenous.Therefore, the ambiguity re- garding the interlinkages between FDI and the RER, is at two levels:(a) which causes what, FDI or RER and (b) even if causality is established, which theory is correct. To resolve these two issues we distinguish between trade integrated Models and Models of financial behavior.The first type of Models refers to trade inte- grated markets with low RER volatility,where FDI is the driving force of RER movements. In such markets, FDI policies will have important implications for RER movements. The second type of Models refers to freely floating currencies, where the volatility of the RER is quite large and therefore RER is the driving forceofFDImovements.Insuchmarkets,RERpolicieswillhaveimportant implications for FDI movements.
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