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Does Money Follow the Flag?

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

Nandini Gupta

Indiana University - Kelley School of Business - Department of Finance

Xiaoyun Yu

Indiana University - Kelley School of Business - Department of Finance; 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

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

Nandini Gupta

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3416 (Phone)
812-855-5875 (Fax)

Xiaoyun Yu (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3521 (Phone)
812-855-5875 (Fax)

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

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