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

Brandon Julio

London Business School

Youngsuk Yook

Federal Reserve Board

April 25, 2014

We examine the effects of government policy uncertainty on cross-border capital flows using election timing as a source of fluctuations in uncertainty. We compare variation in relatively irreversible foreign direct investment (FDI) flows with that of foreign portfolio investment (FPI) around election cycles, controlling for the determinants of both flows. FDI flows from US companies to foreign affiliates drop significantly during the period just before an election while FPI flows show no significant decline in the same time period. 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 elections are more competitive. The results suggest a likely causal link from political uncertainty to capital flows.

Number of Pages in PDF File: 49

Keywords: Political Uncertainty, Foreign Direct Investment

JEL Classification: G15, G31, G38

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Date posted: March 20, 2012 ; Last revised: May 10, 2014

Suggested Citation

Julio, Brandon and Yook, Youngsuk, Policy Uncertainty, Irreversibility, and Cross-Border Flows of Capital (April 25, 2014). 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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References:  34
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