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Analyzing the Impact of Fdi on Inflation of the Nafta Countries Using Fixed Effects

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Analyzing the impact of FDI on Inflation of the NAFTA Countries using Fixed Effects Model and Random Effect Model
Objective of this study is to examine the impact of foreign direct investment on the inflation of the NAFTA countries (United States, Canada and Mexico). To conduct the analysis we have developed a panel data set consisting of FDI and inflation data of all three countries from 1988 to 2014. One important aspect of this analysis is test the notion that unobservable factors that might simultaneously affect the left hand side and right hand side of the regression are time-invariant.
To test this, we need to use Fixed Effects (F-E) model and Random Effects (R-E) model. We used STATA for necessary analysis. Results are presented below:
Simple OLS regression (see Table-1) tells us that for NAFTA countries, FDI and inflation is negatively correlated and statistically significant. The estimated coefficient of -.0000251 indicates that for 1 dollar increase in FDI, inflation is expected to decrease by .0000251%, ceteris paribus.
The data set has been estimated by both 1) least squares dummy variable (LSDV) estimator. 2) Fixed effects estimator. The LSDV (see Table-2) fits the data better than does the pooled OLS. The F statistic increased from 5.05 to 10.21 (p<0000); SSE (sum of squares due to error or residual) decreased from .633356331 to .482044733; and R2 increased from 0.0601 to 0.2846. Due to the dummies included, this model loses two degrees of freedom (from 79 to 77). Parameter estimates is different from those in the pooled OLS. Under LSDV, FDI is no more a significant estimator of inflation.
Fixed-effects regression (see Table-3) provides us P value of 0.4669 and F value of 0.53, which lead us to the acceptance of the null hypothesis that three dummy parameters in LSDV are zero (e.g., μ1=0, μ2=0, μ3=0). The intra-class correlation measurement…...

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