Elections Matter: Capital Flows and Political Cycles

This paper contributes to the relatively limited literature on the impact of political uncertainty on international capital flows to emerging market economies. We incorporate elections as a proxy for political uncertainty into a standard push-pull framework for analyzing capital flows. Using quarterly data for a panel of 38 emerging market economies from 1990 to 2020, we show that periods surrounding elections are associated with a decline in gross private capital inflows. This adverse impact is larger and more persistent when uncertainty extends beyond the election period, for example in the context of uncertain policy priorities following incumbent’s loss. By contrast, higher levels of overall political stability appear to mitigate these adverse effects. We also find evidence that stronger institutions, as reflected in indicators such as regulatory quality and rule of law, help to mitigate the adverse effects of political uncertainty on capital flows. The results remain robust across a range of alternative specifications, including controls for standard economic drivers of capital flows, election characteristics, and model assumptions.