Policy Uncertainty, Irreversibility, and Cross-Border Flows of Capital

51 Pages Posted: 6 Nov 2013

See all articles by Brandon Julio

Brandon Julio

Lundquist College of Business, University of Oregon

Youngsuk Yook

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: August 31, 2013

Abstract

We examine the effects of government policy uncertainty on cross-border capital flows. FDI flows from US companies to foreign affiliates drop significantly during the period just before an election. The election effect for FDI is larger than election cycles in domestic investment. The electoral patterns in FDI flows are more pronounced in countries with higher propensities for policy reversals and when election outcomes are more uncertain. Our identification strategy compares variation in different types of capital flows into the same country around the timing of national elections. The electoral cycles are present in relatively irreversible FDI flows but not in foreign portfolio investment flows, suggesting a likely causal link from political uncertainty to and capital flows.

Keywords: Foreign direct investment, political uncertainty

JEL Classification: G15, G31, G38

Suggested Citation

Julio, Brandon and Yook, Youngsuk, Policy Uncertainty, Irreversibility, and Cross-Border Flows of Capital (August 31, 2013). FEDS Working Paper No. 2013-64 . Available at SSRN: https://ssrn.com/abstract=2350872 or http://dx.doi.org/10.2139/ssrn.2350872

Brandon Julio

Lundquist College of Business, University of Oregon ( email )

1280 University of Oregon
Eugene, OR 97403
United States

Youngsuk Yook (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-475-6324 (Phone)

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