Capital Flows And Political Events

This empirical study analyses the effect of election-induced political uncertainty on crossborder capital flows using a comprehensive data set of 134 national elections in 29 emerging economies. Foreign direct investments [FDI] and portfolio investments [FPI] are examined separately for foreign investors, as well as domestic agents. The main result is that FPI of foreign investors and domestic agents decrease post-election if a new president or a new ruling party is appointed. However, no significant effect resulting from elections was found for FDI. These results support the argument that FPI are more sensitive to temporary political uncertainty as their liquidity allows investors to easily shift their money to safer countries. Institutional quality measures, such as corruption and government stability, change the impact of elections on capital flows. FDI and FPI of foreign investors are both reduced during elections in countries with high levels of corruption. In addition, during elections in countries with low government stability FDI of foreign investors are lowered. When accounting for different institutional quality measures, elections do not impact the investment behaviour of domestic agents significantly.