Is Monetary Expansion Always and Everywhere, Detrimental to Capital Inflows? Some Policy Lessons for Nigeria.

Abstract

The paper employs error correction methodology to investigate the effect of monetary expansion on the flow of FDI into the economies of Nigeria, Ghana, Argentina, Australia, China, the U.S. and the U.K. using annual time series data covering the period from the 1980s to 2010/2011, sourced from the World Bank’s World Development Indicators. The empirical evidence indicates that monetary expansion has negative, but insignificant effect on FDI inflows in middle-income countries of Nigeria, Ghana and Argentina, and positive effect on FDI inflows in high income countries of Australia, China, the U.K. and the U.S., though the effect in U.K. and U.S. is statistically insignificant. With the exception of Ghana and Australia, the paper also finds that economic growth has positive effect on net FDI inflows, though insignificant for the U.K economy.  The paper argues that monetary expansion is not always and everywhere detrimental to FDI inflows, but that the effect depends on several factors such as the source of the expansion, level of development of the financial system, economic growth, etc. The paper recommends inter alia that the middle- income countries channel efforts at developing their financial systems and the growth-linked sectors of their economies so as to attract more FDI, and assuage the negative effects of excessive FDI inflows, ultimately enhancing the growth of the economy.