Abstract:
In this paper, we analyze the effects of uncertainty shocks on portfolio flows in 25 emerging market and 21 advanced economies and shed light on socio-economic characteristics that may be relevant for the country-specific sensitivity towards the shocks. We derive uncertainty shocks from a proxy SVAR model, where the uncertainty shock is identified by changes in the price of gold during selected events. Taking into account the structural shock, we employ local projections of investment fund flows into 25 emerging market and 21 advanced economies for the period 2005M8 to 2023M12. Our results show that uncertainty shocks have much stronger negative effects on capital flows in emerging economies for both bond and equity flows. Our results also show that bond fund flows are much more strongly affected by uncertainty shocks compared to equity flows over both the short and the medium run. Finally, we find that economic characteristics relating to the sensitivity towards the shock differ across advanced economies and emerging markets.
