THE IMPACT OF THE CENTRAL BANK’ S INDEPENDENCE ON THE CAUSALITY BETWEEN THE LEVELS OF TRADE OPENNESS AND FOREIGN DIRECT INVESTMENT

Hermann Sintim-Aboagye
Montclair State University
Serapio Byekwaso
VP, Statistical Services
WebMD, LLC
Dong-Kyoon Kim,
Montclair State University,
ABSTRACT
This study revisits the links between trade openness and investment fund flows and
specifically examines the possible influence of degrees of central bank independence (CBI) on the
relationship between trade openness and investment fund inflows into an economy. The authors used
the same panel data of 22 countries that looked into links between openness, FDI inflows and CBI
without considering how the extent of openness could influence the inflows of investment funds. The
authors examined the data on FDI inflows and openness to causality tests within Pedroni’s panel
cointegration framework. The authors divided the countries into groups of high and low CBI and
open countries. The results of our tests indicate a strong cointegration between the extent of
openness and FDI inflows. The authors then proceeded with panel causality tests among the
subgroups of high and low CBI and openness and observed some varying outcomes. The low
openness subgroup displays, in both the long and short runs, significant bidirectional links between
FDI inflows and openness except when coupled with high degrees of CBI. In the latter scenario,
results show only a significant unidirectional link of openness inducing FDI. High openness
economies show a lack of evidence in the long run of FDI inflows, causing openness, except in the
context of low CBI, where a significant long-run link between the two variables is confirmed. So,
consistent across all subgroups of openness, long run outcomes support trade openness inducing
FDI inflows regardless of levels of CBI.
Keywords: Central bank independence, foreign direct investment, trade openness, emerging countries, inflation rates