Research On The Impact Of US Economic Policy Uncertainty On Global Cross-Boarder Capital Flows

Since the global financial crisis in 2008,the world economy recovers slowly from the crisis and the cross-border capital flows grows sluggishly.Uncertainties such as the European debt crisis,Brexit,the US-China trade war,the Russia-Ukraine conflict and the coronavirus disease 2019(COVID-19)occurred frequently in recent years,and the world is stuck in hunge changes and the COVID-19,which results in a sharply increasing global economic uncertainty.All the governments around the world enact and enforce a series of fiscal,monetary and trade policies to cope with the impact of these uncertainties.However it further enhances the difficulty of international policy coordination and increases the global economic policies uncertainty(EPU for short).As the core country of the world,the U.S.is the largest transmitter of global EPU,therefore the U.S.EPU may change expectations of international investors and has a huge effect on the scale,direction and structure of cross-border capital flows.After the global financial crisis,cross-border capital flows are much more frequently and volatile.There has been a plenty of sudden reversal of cross-border capital flows,which impacts the stability of financial markets around the world,increases the vulnerability of national financial systems,and even triggers systemic financial risks.Cross-border capital flows are aslo closely related to adjustments in the U.S.economic policies in history.To clarify the relationship between the U.S.EPU and global cross-border catpital flows,it is necessary to explore the mechanism and influence of the U.S.EPU on cross-border capital flows.it will provide an important theoretical and factual basis for preventing EPU in core countries and strengthening the regulation of cross-border capital flows.Based on influence factors of cross-border capital flows,this paper explores the impact of the U.S.EPU on global cross-border capital flows in the logical sequence of "Problems-Theoretical framework-Facts-Eempirical tests-Recommendations".The main research components are as follows.First of all,typical facts analysis of the U.S.EPU and global cross-border capital flows are mainly in Chapter 3.It introduces the measurement and development of the U.S.EPU and different types of cross-border capital flows.The correlation between the U.S.EPU and cross-border capital flows is initially verified in terms of correlation coefficients and Granger causality tests,which lay a foundation for the following theorital analysis.Second,theoretical framework of the U.S.EPU affecting global cross-border capital flows is mainly in Chapter 2 and the first half of Chapter 4.Chapter 2 is the literature review about cross-border capital flows and the U.S.EPU,which lays theoretical foundation of this paper.Chapter 4 introduces the U.S.EPU into the Taylor model,triple-motive model,and mean-variance model,and then analyses the impact of spreads,exchange rates,asset prices ans risk contagion on cross-border capital flows.Both parts form the theoretical and logical starting point for this paper.Third,the empirical tests of the U.S.EPU and global cross-border capital flows are mainly in the last part of Chapter 4 and Chapters 5 to 8.Based on quarterly panel data from 2000 to 2020,there are two parts of empirical tests.One is about channels and mechanisms of transmission of the U.S.EPU by PVAR model,and the other about the U.S.EPU affecting the scale,structure and volatility of cross-border capital flows by panel fixed-effect model and logit model.Specifically,the empirical results of transmission channels and mechanisms show that(1)the U.S.EPU granger causes spreads,exchange rate,asset prices and global investors’ risk aversion in one-way,and so as the transmission mechanism variables to scale and structural cross-border capital flows.However double-way granger causalities exist between the U.S.EPU and total cross-border capital inflows,outflows,FDI.It still needs some further empirical tests.(2)the U.S.EPU affects total cross-border capital inflows and outflows mainly through the channels of exchange rate and risk contagion,and the channel of spreads works less,and the transmission of the asset price channel is not obvious;the U.S.EPU affects net cross-border capital flows through the interest rate channel,while the transmission of the channel of exchange rate,asset prices and risk contagion do not exist;(3)the U.S.EPU affects FDI through the channel of spreads,and affects cross-border bank credit andportfolio capital through the channels of exchange rate and risk contagion.But the U.S.EPU can not affect cross-border portfolio capital outflows through the above four channels;(4)the U.S.EPU affects short-term cross-border capital flows through four channels,namely asset prices,exchange rates,risk contagion and spreads.(5)the U.S.EPU strongly affects surges and flight through the channel of exchange rate,the channels of spreads and asset price work less,and effect of risk contangion channel is not obvious;at the same time,the U.S.EPU strongly affects stops and withdrawals through channel of risk contangion,effects of channel of exchange rate,spreads and asset price are less obvious.The other part is carried out about the U.S.EPU affecting the scale,structure,and volatility of cross-border capital flows based on quarterly panel data from 2000 to 2020,and the time-varying impact on China’s cross-border capital flows based on monthly data from 2000 to 2021.Specifically,the impact of the U.S.EPU affecting scale of cross-border capital flows,which are gross inflows,gross outflows and net flows.The results show that:(1)the U.S.EPU has a significant negative impact on scale of cross-border capital flows,but the U.S.EPU has a larger negative impact on gross flows.(2)the U.S.EPU has a non-linear impact on scale of cross-border capital flows.There is a negative impact when the U.S.EPU is low,but a positive impact when the U.S.EPU is above a certain level;the negative impact of the U.S.EPU on cross-border capital flows in emerging market countries is more significant,and the cross-border capital flows in developed countries are mainly affected by global factors,arbitrage and the financial development;the U.S.EPU has a larger negative impact on cross-border gross capital flows and cross-border portfolio investment in countries with high financial development,and a larger negative impact on net cross-border capital flows and cross-border bank credit in countries with low financial development.The impacts of the U.S.EPU on structure of cross-border capital flows focuse on short-term cross-border capital flows,which is a typical structural indicator.The results show that:(1)The impact of the U.S.EPU on short-term cross-border capital flows is significantly positive.(2)the U.S.EPU has a significant positive impact on short-term cross-border capital flows in emerging countries;there is no significant difference between different financial development,that is,financial development does not directly influence how the U.S.EPU affects short-term cross-border capital flows.(3)Macroprudential regulatory policies can weaken the effect of the U.S.EPU on short-term cross-border capital to a certain extent.Especially tight capital-based and credit-based macroprudential tools have obvious weaken effects.(4)The effects of macroprudential policies are much more different between the developed and the emerging market countries,which relsut from the financial development and institutional quality.The impacts of the U.S.EPU on volatility of cross-border capital flows focus on four different kinds of abnormal cross-border capital flows.The results show that:(1)The frequency is quite different among different kinds of abnormal cross-border capital flows.Stops and withdrawals occur most frequently,follwed by surges and least by flight;Meanwhile,withdrawals of cross-border portfolio investment and cross-border bank credit occur most frequently,and withdrawal and flight of FDI occur least.(2)The U.S.EPU reduces the probability of surges and flight,and increases the probability of stops and withdrawals.(3)The effects of different kinds of the U.S.EPU on abnormal cross-border capital flows are quite different.The uncertainties in fiscal,monetary and trade policies increase probabilities of stops and withdrawals.Fiscal policy uncertainty(FPU)significantly reduces the probability of surges and fligts,while monetary policy uncertainty(MPU)negatively affect the probability of flights only.The U.S.EPU has a significant positive effect on the stops and withdrawals of FDI,cross-border portfolio investment,and cross-border bank credit,and a significant negative effect on the surge and flight of FDI,cross-border portfolio investment flight,and cross-border bank credit surge;the effect of the U.S.EPU on stops and flights in the developed is much larger than that on the emerging market countries,but the effect on the surges and withdrawals is not significant in the developed.There is no significant difference between the developed and emerging market countries.(4)The financial development and capital account openness have a moderating impact on the effects of U.S.EPU on abnormal cross-border capital flows.The time-varying impact of the U.S.EPU on China’s cross-border capital flows is carried out based on international direct investment and short-term cross-border capital flows.The results show that:(1)Suject to a shock from the U.S.EPU,China’s short-term cross-border capital flows response negatively.Net cross-border portfolio investments and gross outflows response positively.All the three show a significant short-term effect.Meanwhile,China’s net cross-border bank credit flows response significantly different in the long-and short-run,which show a significant negative response in the short run and a significant positive response in the mediumand long-run.Gross cross-border bank credit flows show a persistent negative response at different intervals(2)There is no significant time-varying effects with shocks of the U.S.EPU on net international direct investment flows and gross outflows,which has been found in international direct investment inflows.(3)The tests of channels and mechanisms show that the U.S.EPU affects China’s short-term cross-border capital flows through the channels of risk contagion,spreads and asset price.The U.S.EPU affects international direct investment through the channel of exchange rate and risk contagion,and affects net international direct investment in short-run through risk contagion channel.The U.S.EPU affects international direct investment in shor-and medium-run through the asset price channel.Also the U.S.EPU affects international direct investment in long-run through spreads channelFinally,recommendations were made in four areas: stabilize economic fundamentals by accelerating the cultivation of endogenous growth drivers;smooth economic policy uncertainty by enhancing economic policy coordination among countries;improve the management of cross-border capital flows by building up a two-in-one regulatory framework;and enhance resilience to external uncertainties by accelerating the financial development.There are three main innovations in this paper.First,it makes a certain marginal contribution to the study of the influence factors of cross-border capital flows.It is not subject to traditional influent factors or global EPU.This paper explores the impact of EPU of the core power,the United States,on global cross-border capital flows.It provides a new perspective for studying the drivers of cross-border capital flows,enriches the content of the drivers of cross-border capital flows and furtherly enhances the explanatory power of global factors on global cross-border capital flows.Second,it explores the impact of the U.S.EPU on different types of cross-border capital flows comprehensively.Previous researches have either focused on scale indicators,or short-term cross-border capital flows and abnormal cross-border capital flows,which are somewhat homogeneous.This paper distinguishes different types of cross-border capital flows at three levels: scale,structure and volatility,and focuses on the degree of their risk accumulation and contagion one by one.Third,this paper builds up a theoretical framework of "the U.S.EPU→channels and mechanisms→cross-border capital flows",and expands the traditional triple motive to four channels: spread,exchange rate,asset price and risk contagion.The transmission mechanism of the U.S.EPU has been tested both theoretically and empirically.