Does Money Follow the Flag?

Gupta, Nandini; Yu, Xiaoyun

doi:10.2139/ssrn.1316364

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Does Money Follow the Flag?

33 Pages Posted: 17 Feb 2009 Last revised: 12 May 2014

See all articles by Nandini Gupta

Nandini Gupta

Indiana University - Kelley School of Business - Department of Finance

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF); European Corporate Governance Institute (ECGI); National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER); China Academy of Financial Research (CAFR)

Date Written: May 1, 2007

Abstract

We examine whether bilateral political relations can explain investment and trade flows between the United States and other countries. We treat political relations as endogenous using instrumental variable analysis and investigate whether an exogenous shock to political relations, the 2003 war in Iraq, leads to a shift in economic flows. The results suggest that a deterioration in bilateral relations is followed by a significant decrease in economic flows between the United States and that country. These results are robust to country fixed effects, income, industry growth, financial market development, and risk.

Keywords: international capital flows, foreign portfolio investment, political relations

Suggested Citation: Suggested Citation

Gupta, Nandini and Yu, Xiaoyun, Does Money Follow the Flag? (May 1, 2007). Available at SSRN: https://ssrn.com/abstract=1316364 or http://dx.doi.org/10.2139/ssrn.1316364