U.S. economic uncertainty shocks and extreme capital flows episodes: An empirical analysis of emerging and developing economies

Abstract

We use the two-way fixed-effect panel logit model to examine the impact of U.S. economic uncertainty shocks on the probability of extreme capital flow episodes based on quarterly data from 71 emerging and developing economies from 1998Q1 to 2022Q4. According to the findings, U.S. economic uncertainty shocks has a negative effect on the probability of gross capital surges, gross capital flight, and net capital surges, and has a positive effect on the probability of gross capital sudden stops, gross capital retrenchment, and net capital sudden stops. Moreover, we find differences in the factors affecting net and gross capital flows, which are usually more closely related to earnings factors dominated by real economic growth rates. Additionally, the sample's heterogeneity is analysed in accordance with the exchange rate regimes. Our results differ from traditional views, as floating exchange rates do not act as a buffer against extreme capital flows. Finally, capital flows are classified into direct investment, other investment, and portfolio investment, and it is found that U.S. economic uncertainty shocks have a significant impact on the extreme flow episodes of other and portfolio investment.