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Policy Uncertainty Spillovers to Emerging Markets - Evidence from Capital Flows

Ludovic Gauvin, Cameron McLoughlin () and Dennis Reinhardt ()

Working papers from Banque de France

Abstract: We study the extent to which uncertainty in advanced country macroeconomic policy spills over to emerging markets via portfolio bond and equity flows. We find that increases in US policy uncertainty significantly reduce portfolio bond and equity flows into EMEs. Conversely, increases in EU policy uncertainty have different effects on equity vs. bond flows into EMEs: equity inflows increase, but bond inflows decrease. The spillover effect of policy uncertainty on capital flows depends on the time period as well as on global and domestic economic conditions. After the financial crisis more of the effect of policy uncertainty on capital flows was transmitted via overall financial market uncertainty than previously. We also find evidence for a structural break in the direction and explanatory power of portfolio flow determinants including policy uncertainty in Q2 2007 at the onset of the financial crisis, and again in Q4 2010. For both bond and equity flows, the level of global financial market uncertainty is the chief driver of the nonlinearities, while in addition to the global factor the level of country specific default risk matters for equity flows only.

Keywords: Policy Uncertainty; Portfolio Capital Flows; Emerging Market Economies; Nonlinearity. (search for similar items in EconPapers)
JEL-codes: F21 F32 F42 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2013
New Economics Papers: this item is included in nep-ifn
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Working Paper: Policy uncertainty spillovers to emerging markets – evidence from capital flows (2014) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:435

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