In what way can a central bank discourage foreign investment?

The most effective means by which a central bank can discourage foreign investment is by increasing interest rates significantly. Higher interest rates typically lead to a more attractive environment for domestic investment, as they often signal a stronger, more stable economy, and can provide better returns for investors within the country. Additionally, higher interest rates can lead to increased costs of borrowing for foreign investors seeking to finance their investments, which may lead them to reconsider or withdraw their investments altogether.

In contrast, increasing the money supply and lowering interest rates would likely encourage foreign investment, as lower borrowing costs and ample liquidity can attract investors looking for favorable conditions. Raising trade tariffs primarily impacts trade relations and the costs associated with importing goods rather than directly influencing investment decisions. Finally, depreciating the local currency may actually make foreign investments more appealing because it makes acquiring assets cheaper for foreign investors. Thus, increasing interest rates is a clear and direct method for a central bank to discourage foreign investment.