Economic Uncertainty and Extreme Capital Flow Movement

Yang Zhou and So Umezaki

No 967, IDE Discussion Papers from Institute of Developing Economies, Japan External Trade Organization(JETRO)

Abstract: The relationship between uncertainty and capital flows has attracted significant attention; however, the specific impact of economic (policy) uncertainty arising from extreme events on extreme capital flow movements remains understudied. This paper examined the effects of global and domestic economic uncertainty on extreme capital flow movement by analyzing a comprehensive dataset encompassing 57 countries on a quarterly basis from 1986 Q1 through 2023 Q4. Our results suggested that (i) in contrast to financial uncertainty, heightened U.S. EPU actually reduces the probability of stops and retrenchment occurrences and this effect is predominantly driven by U.S. Fiscal Policy Uncertainty; (ii) in the post-crisis period, U.S. EPU has gradually superseded financial uncertainty as one of the key drivers of extreme capital movements; (iii) unlike domestic EPU that exerts limited influence on extreme capital flowepisodes, we found that elevated domestic WUI shocks reduce the probability of surge occurrences, and this effect is predominantly driven by the pre-crisis period in emerging markets; (iv) while demonstrating effects similar to U.S. EPU, U.S. WUI effects materialize after a twoquarter lag, indicating the presence of a temporal delay in U.S. WUI's impact.

Keywords: Capital; flow; movement|Economic; policy; uncertainty|Sudden; stops|Extreme; events (search for similar items in EconPapers)
JEL-codes: F32 G32 (search for similar items in EconPapers)
Date: 2025-03
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Published in IDE Discussion Paper = IDE Discussion Paper, No.967. 2025-03

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