Inflation Impact on Foreign Direct Investment - Evidence from Western Balkan Countries

The objective of this article is to explore the degree of relationship between inflation and foreign direct investments (FDI) and other macroeconomic indicators in Western Balkan countries.This is a quantitative empirical study relied on regression model, generalized method of moments (GMM) and other econometric measurements such as fixed effects model, random effects model and Pooled OLS model.The data on this empirical study is relied on 15 years observation of each of six Western Balkan countries.The study combines two types of variables with panel data from World Bank Open Data and KAS for the period 2008-2022.The results indicate a significant positive impact of inflation rate on FDI.A percentage rise in inflation rate is related with 0.30% short-term FDI growth, at an average of 5% ceteris paribus.Furthermore, the results indicate the statistically positive effect of inflation rate on GDP growth.A percentage increase in inflation rate is correlated with 0.17% increase in GDP.On the other hand, results revealed the inversely relationship between inflation rate and unemployment.A percentage change in inflation rate is associated by -0.168% reduction of unemployment in the short term.This intercourse will reduce unemployment and may provide conditions for increased employment in these countries.The results of the study confirm that the rate of inflation, FDI, GDP growth and unemployment rate over the years manifest an inelastic relationship among themselves.Based on our study findings we suggest some policy recommendations.Governments, through appropriate fiscal policies, can support local monetary policies to manage inflation.Initially, through policies that will enable the reduction of public expenditures and the reduction of high inflation rates.Secondly, Central banks, through appropriate policies, should manage inflation rates in their countries in order to ensure macroeconomic stability.