Country-specific uncertainty and capital inflows in emerging market economies

This paper assesses the extent to which country-specific uncertainty affects gross capital inflows and episodes of extreme capital inflows in the form of sudden stops and sudden surges in emerging market economies. The main findings indicate that an increase in country-specific uncertainty is associated with a decline in aggregate capital inflows and a decline in specific types of capital inflows including equity, portfolio, and direct investment. In addition, heightened uncertainty is also associated with a drop in net capital inflows. Furthermore, the results suggest that an increase in uncertainty could be associated with an increase in the probability of exiting a period of normal capital flows into a sudden stop episode, and that, heightened uncertainty could be negatively associated with the probability of exiting a tranquil period and experiencing a sudden surge.