Policy uncertainty spillovers to emerging markets – evidence from capital flows

Ludovic Gauvin, Cameron McLoughlin () and Dennis Reinhardt

No 512, Bank of England working papers from Bank of England

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 (search for similar items in EconPapers)
JEL-codes: F21 F32 F42 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2014-09-26
New Economics Papers: this item is included in nep-ifn and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (38)

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Related works:
Working Paper: Policy Uncertainty Spillovers to Emerging Markets - Evidence from Capital Flows (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0512

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