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Policy Uncertainty, Irreversibility, and Cross-Border Flows of Capital

Brandon Julio

London Business School

Youngsuk Yook

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, G38

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Date posted: March 20, 2012 ; Last revised: August 11, 2013

Suggested Citation

Julio, Brandon and Yook, Youngsuk, Policy Uncertainty, Irreversibility, and Cross-Border Flows of Capital (August 10, 2013). Available at SSRN: http://ssrn.com/abstract=2024612 or http://dx.doi.org/10.2139/ssrn.2024612

Contact Information

Brandon Julio (Contact Author)
London Business School ( email )
Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
+44 (0)20 7000 8254 (Phone)
Youngsuk Yook
Federal Reserve Board ( email )
20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-475-6324 (Phone)
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