Policy Uncertainty Spillovers to Emerging Markets - Evidence from Capital Flows

42 Pages Posted: 5 Jun 2013

See all articles by Ludovic Gauvin

Ludovic Gauvin

Banque de France; Université Paris Ouest - Nanterre, La Défense - EconomiX

Cameron McLoughlin

Banque de France

Dennis Reinhardt

Bank of England

Multiple version iconThere are 2 versions of this paper

Date Written: June 2013

Abstract

We study the extent to which uncertainty in advanced country macroeconomic policy spills over to emerging markets via portfolio bond and equity flows. We find that increases in US policy uncertainty significantly reduce portfolio bond and equity flows into EMEs. Conversely, increases in EU policy uncertainty have different effects on equity vs. bond flows into EMEs: equity inflows increase, but bond inflows decrease. The spillover effect of policy uncertainty on capital flows depends on the time period as well as on global and domestic economic conditions. After the financial crisis more of the effect of policy uncertainty on capital flows was transmitted via overall financial market uncertainty than previously. We also find evidence for a structural break in the direction and explanatory power of portfolio flow determinants including policy uncertainty in Q2 2007 at the onset of the financial crisis, and again in Q4 2010. For both bond and equity flows, the level of global financial market uncertainty is the chief driver of the nonlinearities, while in addition to the global factor the level of country specific default risk matters for equity flows only.

Keywords: Policy Uncertainty, Portfolio Capital Flows, Emerging Market Economies, Nonlinearity

JEL Classification: F21, F32, F42

Suggested Citation

Gauvin, Ludovic and McLoughlin, Cameron and Reinhardt, Dennis, Policy Uncertainty Spillovers to Emerging Markets - Evidence from Capital Flows (June 2013). Available at SSRN: https://ssrn.com/abstract=2273452 or http://dx.doi.org/10.2139/ssrn.2273452

Ludovic Gauvin (Contact Author)

Banque de France ( email )

Paris
France

Université Paris Ouest - Nanterre, La Défense - EconomiX ( email )

200 Avenue de la République
Nanterre cedex, Nanterre Cedex 92000
France

Cameron McLoughlin

Banque de France ( email )

Paris
France

Dennis Reinhardt

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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