Macroeconomic Policy in Europe: Experiments with monetary responses and fiscal impulses

The purpose of this paper is to investigate the role of exchange rate uncertainty in determining foreign direct R&D investment into the UK. Specifically, we examine the impact of the UKs possible entry into EMU, where we exploit the fact that on entry the covariance of the Euro and sterling will rise. We estimate an econometric model of FDI in R&D, using a panel of manufacturing industries. Our results suggest that an increase in the volatility of the euro-dollar exchange rate tends to relocate R&D investment from the Euro Area into the UK. A rise in the covariance of the Euro and sterling will increase foreign direct R&D investment into the UK.