Examining the Relationship between FDI, Financial Development, Exchange Rate and Inflation in Yemen

Abstract

The aim of this paper is to examine the cointegration among FDI, financial development, exchange rate and inflation in Yemen for the 1990-2014 period. The ARDL bounding the maximum likelihood and also identify the long-run and short-run relationship between the research variables. It is important to highlight these relationships in less developing countries due to low FDI inflows. Overall, the main findings show there is cointegration among FDI and FD, exchange rate, inflation. In the long the results depict there is negative and significant relationship between FDI and FD. The other two independent variables; exchange rate and inflation did not show any meaningful correlation with foreign direct investment as their long run coefficients are not significant. In the short run the results depict there is negative and significant relationship between FDI, FD and EX. The country needs various policies to attract FDI in Yemen. Furthermore, it is also very important to focus on financial development to support FDI inflows in coming years in Yemen.

Key words: FDI, financial development, exchange rate and inflation, Yemen.