Policy Uncertainty, Irreversibility, and Cross-Border Flows of Capital
Lundquist College of Business, University of Oregon
Board of Governors of the Federal Reserve System
August 17, 2016
Journal of International Economics, Forthcoming
We examine the effects of political uncertainty on cross-border capital flows using election timing as a source of fluctuations in political uncertainty. FDI flows from US companies to foreign affiliates drop significantly during the period just before an election and increase after the uncertainty is resolved, consistent with the view that political uncertainty deters foreign investment. The electoral patterns in FDI flows are more pronounced when elections are more competitive. The impact of political uncertainty on FDI flows depends on the level of institutional quality. Countries with higher levels of institutional quality experience significantly less variation in FDI around election cycles.
Number of Pages in PDF File: 42
Keywords: Political Uncertainty, Foreign Direct Investment
JEL Classification: G15, G31, G38
Date posted: March 20, 2012 ; Last revised: August 28, 2016
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