Economic policy uncertainty in advanced countries and portfolio capital flows to emerging markets
Cameron McLoughlin () and
Dennis Reinhardt ()
Rue de la Banque, 2016, issue 34
Uncertainty in advanced countries’ economic policies spills over to emerging markets via portfolio bond and equity flows. A negative uncertainty shock in an advanced country has two opposing effects on portfolio flows: i) it can trigger a portfolio rebalancing in the form of flows towards other economies; and ii) it can prompt a flight to quality, potentially leading to a reduction in flows to EMEs. Flights to quality tend to be more marked during periods of stress in global financial markets, so that an uncertainty shock that might have had a positive impact during a “tranquil” period can instead have a negligible or even negative impact. For example, an increase in policy uncertainty in the United States has no effect on equity flows to EMEs during calm periods, but a negative impact during periods of heightened global risk.
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