Reports
Discussion Papers
No.967 Economic Uncertainty and Extreme Capital Flow Movement
by Yang Zhou, So Umezaki
December 2025
ABSTRACT
The relationship between uncertainty and capital flows has attracted significant attention; however, the specific impact of economic (policy) uncertainty arising from extreme events on extreme capital flow movements remains understudied. This paper examined the effects of global and domestic economic uncertainty on extreme capital flow movement by analyzing a comprehensive dataset encompassing 57 countries on a quarterly basis from 1986 Q1 through 2023 Q4. Our results suggested that (i) in contrast to financial uncertainty, heightened U.S. EPU actually reduces the probability of stops and retrenchment occurrences and this effect is predominantly driven by U.S. Fiscal Policy Uncertainty; (ii) in the post-crisis period, U.S. EPU has gradually superseded financial uncertainty as one of the key drivers of extreme capital movements; (iii) unlike domestic EPU that exerts limited influence on extreme capital flow episodes, we found that elevated domestic WUI shocks reduce the probability of surge occurrences, and this effect is predominantly driven by the pre-crisis period in emerging markets; (iv) while demonstrating effects similar to U.S. EPU, U.S. WUI effects materialize after a two-quarter lag, indicating the presence of a temporal delay in U.S. WUI’s impact.
Keywords: Capital flow movement, Economic policy uncertainty, Sudden stops, Extreme events
JEL classification: F32, G32
PDF available at http://hdl.handle.net/2344/0002001561
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