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

Policy uncertainty, irreversibility, and cross-border flows of capital

Listed author(s):
  • Brandon Julio
  • Youngsuk Yook
Registered author(s):

    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.

    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: http://www.federalreserve.gov/pubs/feds/2013/201364/201364abs.html
    Download Restriction: no

    File URL: http://www.federalreserve.gov/pubs/feds/2013/201364/201364pap.pdf
    Download Restriction: no

    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2013-64.

    as
    in new window

    Length:
    Date of creation: 2013
    Handle: RePEc:fip:fedgfe:2013-64
    Contact details of provider: Postal:
    20th Street and Constitution Avenue, NW, Washington, DC 20551

    Web page: http://www.federalreserve.gov/

    More information through EDIRC

    Order Information: Web: http://www.federalreserve.gov/pubs/feds/fedsorder.html

    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. Rodrik, Dani, 1990. "How should structural adjustment programs be designed?," World Development, Elsevier, vol. 18(7), pages 933-947, July.
    2. James R. Hines & Eric M. Rice, 1994. "Fiscal Paradise: Foreign Tax Havens and American Business," The Quarterly Journal of Economics, Oxford University Press, vol. 109(1), pages 149-182.
    3. Ju, Jiandong & Wei, Shang-Jin, 2007. "Domestic Institutions and the Bypass Effect of Financial Globalization," CEPR Discussion Papers 6343, C.E.P.R. Discussion Papers.
    4. Shang-Jin Wei, 2000. "How Taxing is Corruption on International Investors?," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 1-11, February.
    5. Blonigen, Bruce A., 2001. "In search of substitution between foreign production and exports," Journal of International Economics, Elsevier, vol. 53(1), pages 81-104, February.
    6. Guiso, L. & Parigi, G., 1996. "Investment and Demand Uncertainty," Papers 289, Banca Italia - Servizio di Studi.
    7. William D. Nordhaus, 1975. "The Political Business Cycle," Review of Economic Studies, Oxford University Press, vol. 42(2), pages 169-190.
    8. Dewenter, Kathryn L, 1995. "Do Exchange Rate Changes Drive Foreign Direct Investment?," The Journal of Business, University of Chicago Press, vol. 68(3), pages 405-433, July.
    9. Francis E. Warnock & Chad Cleaver, 2002. "Financial centers and the geography of capital flows," International Finance Discussion Papers 722, Board of Governors of the Federal Reserve System (U.S.).
    10. Pindyck, Robert S. & Solimano, Andres, 1993. "Economic instability and aggregate investment," Policy Research Working Paper Series 1148, The World Bank.
    11. Geert Bekaert & Campbell R. Harvey, 1997. "Foreign Speculators and Emerging Equity Markets," NBER Working Papers 6312, National Bureau of Economic Research, Inc.
    12. Shleifer, Andrei & Vishny, Robert W., 2003. "Stock market driven acquisitions," Journal of Financial Economics, Elsevier, vol. 70(3), pages 295-311, December.
    13. Shleifer, Andrei & Vishny, Robert W, 1992. " Liquidation Values and Debt Capacity: A Market Equilibrium Approach," Journal of Finance, American Finance Association, vol. 47(4), pages 1343-1366, September.
    14. Andrei A Levchenko & Julian Di Giovanni, 2008. "Trade Openness and Volatility," IMF Working Papers 08/146, International Monetary Fund.
    15. Malcolm Baker & C. Fritz Foley & Jeffrey Wurgler, 2009. "Multinationals as Arbitrageurs: The Effect of Stock Market Valuations on Foreign Direct Investment," Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 337-369, January.
    16. Kim, Chansog (Francis) & Pantzalis, Christos & Chul Park, Jung, 2012. "Political geography and stock returns: The value and risk implications of proximity to political power," Journal of Financial Economics, Elsevier, vol. 106(1), pages 196-228.
    17. Kenneth A. Froot & Jeremy C. Stein, 1991. "Exchange Rates and Foreign Direct Investment: An Imperfect Capital Markets Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 1191-1217.
    18. Caballero, Ricardo J, 1991. "On the Sign of the Investment-Uncertainty Relationship," American Economic Review, American Economic Association, vol. 81(1), pages 279-288, March.
    19. Nick Bloom & Stephen Bond & John Van Reenen, 2007. "Uncertainty and Investment Dynamics," Review of Economic Studies, Oxford University Press, vol. 74(2), pages 391-415.
    20. Chuhan, Punam & Claessens, Stijn & Mamingi, Nlandu, 1998. "Equity and bond flows to Latin America and Asia: the role of global and country factors," Journal of Development Economics, Elsevier, vol. 55(2), pages 439-463, April.
    21. Lubos Pastor & Pietro Veronesi, 2011. "Political Uncertainty and Risk Premia," Working Papers 2011-007, Becker Friedman Institute for Research In Economics.
    22. Desai, Mihir A. & Fritz Foley, C. & Hines Jr., James R., 2008. "Capital structure with risky foreign investment," Journal of Financial Economics, Elsevier, vol. 88(3), pages 534-553, June.
    23. Stephanie E. Curcuru & Charles P. Thomas & Francis E. Warnock & Jon Wongswan, 2011. "U.S. International Equity Investment and Past and Prospective Returns," NBER Working Papers 16677, National Bureau of Economic Research, Inc.
    24. Daude, Christian & Fratzscher, Marcel, 2006. "The pecking order of cross-border investment," Working Paper Series 0590, European Central Bank.
    25. Joshua Aizenman, 2002. "Volatility, employment and the patterns of FDI in emerging markets," NBER Working Papers 9397, National Bureau of Economic Research, Inc.
    26. Yu-Fu Chen & Michael Funke, 2004. "Option value, policy uncertainty, and the foreign direct investment decision," Money Macro and Finance (MMF) Research Group Conference 2003 14, Money Macro and Finance Research Group.
    27. Fratzscher, Marcel & Imbs, Jean, 2007. "Risk Sharing, Finance and Institutions in International Portfolios," CEPR Discussion Papers 6496, C.E.P.R. Discussion Papers.
    28. Albuquerque, Rui & Loayza, Norman & Serven, Luis, 2003. "World market integration through the lens of foreign direct investors," Policy Research Working Paper Series 3060, The World Bank.
    29. Geert Bekaert & Campbell R. Harvey & Christian Lundblad, 2004. "Growth Volatility and Financial Liberalization," NBER Working Papers 10560, National Bureau of Economic Research, Inc.
    30. Rodrik, Dani, 1991. "Policy uncertainty and private investment in developing countries," Journal of Development Economics, Elsevier, vol. 36(2), pages 229-242, October.
    31. Busse, Matthias & Hefeker, Carsten, 2007. "Political risk, institutions and foreign direct investment," European Journal of Political Economy, Elsevier, vol. 23(2), pages 397-415, June.
    32. Hermes, N. & Lensink, R., 2000. "Capital flight and the uncertainty of government policies," Research Report 00C30, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
    33. James R. Markusen, 1995. "The Boundaries of Multinational Enterprises and the Theory of International Trade," Journal of Economic Perspectives, American Economic Association, vol. 9(2), pages 169-189, Spring.
    34. Shang-Jin Wei, 1997. "Why is Corruption So Much More Taxing Than Tax? Arbitrariness Kills," NBER Working Papers 6255, National Bureau of Economic Research, Inc.
    35. Avinash Dixit, 2011. "International Trade, Foreign Direct Investment, and Security," Annual Review of Economics, Annual Reviews, vol. 3(1), pages 191-213, 09.
    36. Mihir A. Desai & C. Fritz Foley & James R. Hines, 2004. "A Multinational Perspective on Capital Structure Choice and Internal Capital Markets," Journal of Finance, American Finance Association, vol. 59(6), pages 2451-2487, December.
    37. Goldstein, Itay & Razin, Assaf, 2006. "An information-based trade off between foreign direct investment and foreign portfolio investment," Journal of International Economics, Elsevier, vol. 70(1), pages 271-295, September.
    38. Ito, Takatoshi, 1990. "The timing of elections and political business cycles in Japan," Journal of Asian Economics, Elsevier, vol. 1(1), pages 135-156.
    39. Lipsey, Robert E & Weiss, Merle Yahr, 1984. "Foreign Production and Exports of Individual Firms," The Review of Economics and Statistics, MIT Press, vol. 66(2), pages 304-308, May.
    40. Carol C. Bertaut & Ralph W. Tryon, 2007. "Monthly estimates of U.S. cross-border securities positions," International Finance Discussion Papers 910, Board of Governors of the Federal Reserve System (U.S.).
    41. Mihir A. Desai & C. Fritz Foley & James R. Hines, 2006. "Capital Controls, Liberalizations, and Foreign Direct Investment," Review of Financial Studies, Society for Financial Studies, vol. 19(4), pages 1433-1464.
    42. Charles P. Thomas & Francis E. Warnock & Jon Wongswan, 2004. "The performance of international portfolios," International Finance Discussion Papers 817, Board of Governors of the Federal Reserve System (U.S.).
    43. Maria Boutchkova & Hitesh Doshi & Art Durnev & Alexander Molchanov, 2012. "Precarious Politics and Return Volatility," Review of Financial Studies, Society for Financial Studies, vol. 25(4), pages 1111-1154.
    44. Ben S. Bernanke, 1983. "Irreversibility, Uncertainty, and Cyclical Investment," The Quarterly Journal of Economics, Oxford University Press, vol. 98(1), pages 85-106.
    45. Brandon Julio & Youngsuk Yook, 2012. "Political Uncertainty and Corporate Investment Cycles," Journal of Finance, American Finance Association, vol. 67(1), pages 45-84, 02.
    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:fip:fedgfe:2013-64. 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: (Franz Osorio)

    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.