IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Policy Uncertainty Spillovers to Emerging Markets - Evidence from Capital Flows

Listed author(s):
  • Gauvin, L.
  • McLoughlin, C.
  • Reinhardt, D.

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.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: https://publications.banque-france.fr/sites/default/files/medias/documents/working-paper_435_2013.pdf
Download Restriction: no

Paper provided by Banque de France in its series Working papers with number 435.

as
in new window

Length: 42 pages
Date of creation: 2013
Handle: RePEc:bfr:banfra:435
Contact details of provider: Postal:
Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS

Web page: http://www.banque-france.fr/

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as
in new window


  1. Geert Bekaert & Marie Hoerova, 2010. "Risk, uncertainty and monetary policy," Research Bulletin, European Central Bank, vol. 10, pages 11-13.
  2. Nicholas Bloom, 2007. "The Impact of Uncertainty Shocks," NBER Working Papers 13385, National Bureau of Economic Research, Inc.
  3. Beber, Alessandro & Breedon, Francis & Buraschi, Andrea, 2010. "Differences in beliefs and currency risk premiums," Journal of Financial Economics, Elsevier, vol. 98(3), pages 415-438, December.
  4. R Portes & H Rey, 2000. "The Determinants Of Cross-Border Equity Flows," CEP Discussion Papers dp0446, Centre for Economic Performance, LSE.
  5. Guillermo A. Calvo & Alejandro Izquierdo & Luis-Fernando Mejia, 2004. "On the Empirics of Sudden Stops: The Relevance of Balance-Sheet Effects," NBER Working Papers 10520, National Bureau of Economic Research, Inc.
  6. Marcel Fratzscher, 2011. "Capital Flows, Push versus Pull Factors and the Global Financial Crisis," NBER Chapters, in: Global Financial Crisis National Bureau of Economic Research, Inc.
  7. Bacchetta, Philippe & Tille, Cédric & van Wincoop, Eric, 2010. "Self-Fulfilling Risk Panics," CEPR Discussion Papers 7920, C.E.P.R. Discussion Papers.
  8. Julien Fouquau & Christophe Hurlin & Isabelle Rabaud, 2008. "The Feldstein-Horioka Puzzle: a Panel Smooth Transition Regression Approach," Post-Print halshs-00292472, HAL.
  9. Jesus Fernandez-Villaverde & Pablo Guerron-Quintana & Keith Kuester & Juan F. Rubio-Ramirez, 2011. "Fiscal volatility shocks and economic activity," Working Papers 11-32, Federal Reserve Bank of Philadelphia, revised 05 Jan 2012.
  10. Forbes, Kristin & Fratzscher, Marcel & Straub, Roland, 2012. "Bubble Thy Neighbor: Portfolio Effects and Externalities from Capital Controls," CEPR Discussion Papers 8979, C.E.P.R. Discussion Papers.
  11. Söderlind, Paul, 2000. "Inflation Forecast Uncertainty," CEPR Discussion Papers 2499, C.E.P.R. Discussion Papers.
  12. Harris, Milton & Raviv, Artur, 1993. "Differences of Opinion Make a Horse Race," Review of Financial Studies, Society for Financial Studies, vol. 6(3), pages 473-506.
  13. Wei Xiong & Hongjun Yan, 2010. "Heterogeneous Expectations and Bond Markets," Review of Financial Studies, Society for Financial Studies, vol. 23(4), pages 1433-1466, April.
  14. Jonathan H. Wright, 2011. "Term Premia and Inflation Uncertainty: Empirical Evidence from an International Panel Dataset," American Economic Review, American Economic Association, vol. 101(4), pages 1514-1534, June.
  15. Coudert, Virginie & Mignon, Valérie, 2013. "The “forward premium puzzle” and the sovereign default risk," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 491-511.
  16. Gianna Boero & Jeremy Smith & KennethF. Wallis, 2008. "Uncertainty and Disagreement in Economic Prediction: The Bank of England Survey of External Forecasters," Economic Journal, Royal Economic Society, vol. 118(530), pages 1107-1127, 07.
  17. Bacchetta, Philippe & van Wincoop, Eric, 2012. "Sudden Spikes in Global Risk," CEPR Discussion Papers 8853, C.E.P.R. Discussion Papers.
  18. Francisco J. Gomes & Laurence J. Kotlikoff & Luis M. Viceira, 2007. "The Excess Burden Of Government Indecision," Boston University - Department of Economics - Working Papers Series WP2007-004, Boston University - Department of Economics.
  19. Salvatore Dell’Erba & Dennis Reinhardt, 2011. "Surfing the Capital Waves: A sector-level examination of surges in FDI inflows," Working Papers 11.07, Swiss National Bank, Study Center Gerzensee.
  20. Lambert, F. & Ramos-Tallada, J. & Rebillard, C., 2011. "Capital controls and spillover effects: evidence from Latin-American countries," Working papers 357, Banque de France.
  21. Kristin J. Forbes & Francis E. Warnock, 2014. "Debt-and Equity-Led Capital Flow Episodes," Central Banking, Analysis, and Economic Policies Book Series, in: Miguel Fuentes D. & Claudio E. Raddatz & Carmen M. Reinhart (ed.), Capital Mobility and Monetary Policy, edition 1, volume 18, chapter 9, pages 291-322 Central Bank of Chile.
  22. Bruno, Giovanni S.F., 2005. "Approximating the bias of the LSDV estimator for dynamic unbalanced panel data models," Economics Letters, Elsevier, vol. 87(3), pages 361-366, June.
  23. John Y. Campbell & Adi Sunderam & Luis M. Viceira, 2009. "Inflation Bets or Deflation Hedges? The Changing Risks of Nominal Bonds," NBER Working Papers 14701, National Bureau of Economic Research, Inc.
  24. Prati, Alessandro & Sbracia, Massimo, 2010. "Uncertainty and currency crises: Evidence from survey data," Journal of Monetary Economics, Elsevier, vol. 57(6), pages 668-681, September.
  25. Jorge A Chan-Lau & Peter B. Clark, 1998. "Fixed Investment and Capital Flows ; A Real Options Approach," IMF Working Papers 98/125, .
  26. Reinhardt, Dennis & Dell'Erba, Salvatore, 2013. "Not all capital waves are alike: a sector-level examination of surges in FDI inflows," Bank of England working papers 474, Bank of England.
  27. Kristin J. Forbes & Francis E. Warnock, 2011. "Capital Flow Waves: Surges, Stops, Flight, and Retrenchment," NBER Chapters, in: Global Financial Crisis National Bureau of Economic Research, Inc.
  28. Lensink, Robert & Hermes, Niels & Murinde, Victor, 2000. "Capital flight and political risk," Journal of International Money and Finance, Elsevier, vol. 19(1), pages 73-92, February.
  29. Le, Quan Vu & Zak, Paul J., 2006. "Political risk and capital flight," Journal of International Money and Finance, Elsevier, vol. 25(2), pages 308-329, March.
  30. Delatte, Anne-Laure & Gex, Mathieu & López-Villavicencio, Antonia, 2012. "Has the CDS market influenced the borrowing cost of European countries during the sovereign crisis?," Journal of International Money and Finance, Elsevier, vol. 31(3), pages 481-497.
  31. Pástor, Ľuboš & Veronesi, Pietro, 2013. "Political uncertainty and risk premia," Journal of Financial Economics, Elsevier, vol. 110(3), pages 520-545.
  32. Marcel Fratzscher, 2003. "On currency crises and contagion," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 8(2), pages 109-129.
  33. Gelos, Gaston & Wei, Shang-Jin, 2004. "Transparency and International Portfolio Holdings," CEPR Discussion Papers 4476, C.E.P.R. Discussion Papers.
  34. Marco Pagano, 1989. "Endogenous Market Thinness and Stock Price Volatility," Review of Economic Studies, Oxford University Press, vol. 56(2), pages 269-287.
  35. Chotibhak Jotikasthira & Christian Lundblad & Tarun Ramadorai, 2012. "Asset Fire Sales and Purchases and the International Transmission of Funding Shocks," Journal of Finance, American Finance Association, vol. 67(6), pages 2015-2050, December.
  36. Béreau, Sophie & Villavicencio, Antonia López & Mignon, Valérie, 2010. "Nonlinear adjustment of the real exchange rate towards its equilibrium value: A panel smooth transition error correction modelling," Economic Modelling, Elsevier, vol. 27(1), pages 404-416, January.
  37. Lo Duca, Marco, 2012. "Modelling the time varying determinants of portfolio flows to emerging markets," Working Paper Series 1468, European Central Bank.
  38. Evan W. Anderson & Eric Ghysels & Jennifer L. Juergens, 2005. "Do Heterogeneous Beliefs Matter for Asset Pricing?," Review of Financial Studies, Society for Financial Studies, vol. 18(3), pages 875-924.
  39. Bruce E. Hansen, 1997. "Threshold effects in non-dynamic panels: Estimation, testing and inference," Boston College Working Papers in Economics 365, Boston College Department of Economics.
  40. Gale, D. & Allen, F., 1991. "Limited Market Participation and Volatility of Asset Prices," Weiss Center Working Papers 14-91, Wharton School - Weiss Center for International Financial Research.
  41. Hermes, Niels & Lensink, Robert, 2001. "Capital flight and the uncertainty of government policies," Economics Letters, Elsevier, vol. 71(3), pages 377-381, June.
  42. Benjamin Born & Johannes Pfeifer, 2011. "Policy Risk and the Business Cycle," Bonn Econ Discussion Papers bgse06_2011, University of Bonn, Germany.
  43. Rudebusch, Glenn D. & Swanson, Eric T., 2008. "Examining the bond premium puzzle with a DSGE model," Journal of Monetary Economics, Elsevier, vol. 55(Supplemen), pages 111-126, October.
  44. Bussiere, Matthieu & Mulder, Christian, 2000. "Political Instability and Economic Vulnerability," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 5(4), pages 309-330, October.
  45. Andres Gonzalez & Timo Terasvirta & Dick van Dijk, 2005. "Panel Smooth Transition Regression Models," Research Paper Series 165, Quantitative Finance Research Centre, University of Technology, Sydney.
  46. Enrique G. Mendoza, 2006. "Endogenous Sudden Stops in a Business Cycle Model with Collateral Constraints:A Fisherian Deflation of Tobin's Q," NBER Working Papers 12564, National Bureau of Economic Research, Inc.
  47. Judson, Ruth A. & Owen, Ann L., 1999. "Estimating dynamic panel data models: a guide for macroeconomists," Economics Letters, Elsevier, vol. 65(1), pages 9-15, October.
  48. Michael P. Dooley, 1988. "Capital Flight: A Response to Differences in Financial Risks," IMF Staff Papers, Palgrave Macmillan, vol. 35(3), pages 422-436, September.
  49. Harald Hau & Hélène Rey, 2008. "Global Portfolio Rebalancing Under the Microscope," NBER Working Papers 14165, National Bureau of Economic Research, Inc.
  50. Chang, Eric C. & Cheng, Joseph W. & Khorana, Ajay, 2000. "An examination of herd behavior in equity markets: An international perspective," Journal of Banking & Finance, Elsevier, vol. 24(10), pages 1651-1679, October.
  51. R. G Gelos, 2011. "International Mutual Funds, Capital Flow Volatility, and Contagion – A Survey," IMF Working Papers 11/92, .
  52. Antu Panini Murshid & Ashoka Mody, 2011. "Growth from International Capital Flows; The Role of Volatility Regimes," IMF Working Papers 11/90, .
  53. Ben S. Bernanke, 1983. "Irreversibility, Uncertainty, and Cyclical Investment," The Quarterly Journal of Economics, Oxford University Press, vol. 98(1), pages 85-106.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:bfr:banfra:435. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael brassart)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.