Inflation and foreign direct investment in Turkey

Abstract

This study investigates the short-term and long-term relationship and causality between inflation and foreign direct investments during the 1974–2018 periods for Turkey. The Johansen and Juselius Cointegration Method and the Error Correction Method (VECM) have been applied to examine this issue. After finding the cointegration between the variables, the VECM has been estimated and long-term and short-term causality tests have been carried out based on the VECM. The results have shown that there is no short-term causality between inflation and foreign direct investments in both models. However, the fact that the coefficient of the error correction term (ECT) is negative and significant in both models indicates that there is a long-term causality between inflation and foreign direct investment. An increase in foreign direct investment may lead to a moderate increase in inflation over a long time period. © 2020 Sinergia Press. All rights reserved.