Does Money Follow the Flag?
Indiana University - Kelley School of Business - Department of Finance
Indiana University - Kelley School of Business - Department of Finance; China Academy of Financial Research (CAFR)
May 1, 2007
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.
Number of Pages in PDF File: 33
Keywords: international capital flows, foreign portfolio investment, political relations
Date posted: February 17, 2009 ; Last revised: May 12, 2014