Policy Uncertainty Spillovers to Emerging Markets – Evidence from Capital Flows

50 Pages Posted: 28 Sep 2014

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: September 26, 2014

Abstract

We examine the extent to which uncertainty with regard to macroeconomic policies in advanced countries spills over to emerging market economies (EMEs) via gross portfolio bond and equity flows. We find that the impact of fluctuations in policy uncertainty on portfolio equity flows differs markedly depending on whether changes in policy uncertainty originate from the Untied States or the European Union (EU). Increases in US policy uncertainty reduce both bond and equity inflows into EMEs. Conversely, increases in EU policy uncertainty decrease bond inflows, but increase equity inflows. The size and direction of these spillover effects depends on the level of global risk, with increased European policy uncertainty only having a negative impact on bond inflows into EMEs when global risk is high. For equity inflows, the level of country-specific sovereign default risk also matters for non-linearities: increased EU policy uncertainty pushes portfolio equity inflows into EMEs even if global risk is high, but only into countries with low sovereign default risk.

Keywords: Policy uncertainty, portfolio capital flows, EMEs, non-linearities.

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 (September 26, 2014). Bank of England Working Paper No. 512. Available at SSRN: https://ssrn.com/abstract=2502029 or http://dx.doi.org/10.2139/ssrn.2502029

Ludovic Gauvin

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 (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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