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Economic policy uncertainty in advanced countries and portfolio capital flows to emerging markets

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  • L. GAUVIN
  • C. McLOUGHLIN
  • D. REINHARDT

Abstract

Uncertainty in advanced countries’ economic policies spills over to emerging markets via portfolio bond and equity flows. A negative uncertainty shock in an advanced country has two opposing effects on portfolio flows: i) it can trigger a portfolio rebalancing in the form of flows towards other economies; and ii) it can prompt a flight to quality, potentially leading to a reduction in flows to EMEs. Flights to quality tend to be more marked during periods of stress in global financial markets, so that an uncertainty shock that might have had a positive impact during a “tranquil” period can instead have a negligible or even negative impact. For example, an increase in policy uncertainty in the United States has no effect on equity flows to EMEs during calm periods, but a negative impact during periods of heightened global risk.

Suggested Citation

  • L. GAUVIN & C. McLOUGHLIN & D. REINHARDT, 2016. "Economic policy uncertainty in advanced countries and portfolio capital flows to emerging markets," Rue de la Banque, Banque de France, issue 34, november..
    • Handle: RePEc:bfr:rueban:2016:34
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    File URL: https://publications.banque-france.fr/sites/default/files/medias/documents/rue-de-la-banque_34_2016-11_en.pdf
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    References listed on IDEAS

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    6. Gauvin, L. & McLoughlin, C. & Reinhardt, D., 2013. "Policy Uncertainty Spillovers to Emerging Markets - Evidence from Capital Flows," Working papers 435, Banque de France.
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    Cited by:

    1. Abir Abid & Christophe Rault, 2021. "On the Exchange Rates Volatility and Economic Policy Uncertainty Nexus: A Panel VAR Approach for Emerging Markets," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 19(3), pages 403-425, September.
    2. Ragna Alstadheim & Christine Blandhol, 2018. "The global financial cycle, bank capital flows and monetary policy. Evidence from Norway," Working Paper 2018/2, Norges Bank.

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