Policy Uncertainty, Irreversibility, and Cross-Border Flows of Capital
London Business School
Federal Reserve Board
August 10, 2013
We examine the effects of government policy uncertainty on cross border capital flows. FDI flows from US companies to foreign affiliates drop significantly during the period just before an election. The election effect for FDI is larger than election cycles in domestic investment. The electoral patterns in FDI flows are more pronounced in countries with higher propensities for policy reversals and when election outcomes are more uncertain. Our identification strategy compares variation in different types of capital flows into the same country around the timing of national elections. The electoral cycles are present in relatively irreversible FDI flows but not in foreign portfolio investment flows, suggesting a likely causal link between political uncertainty and capital flows.
Number of Pages in PDF File: 50
Keywords: Political Uncertainty, Foreign Direct Investment
JEL Classification: G15, G31, G38working papers series
Date posted: March 20, 2012 ; Last revised: August 11, 2013
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