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We examine the effects of government policy uncertainty on
cross-border capital flows. FDI flows from US companies to foreign
affiliates drop significantly during the period just before an
election. The election effect for FDI is larger than election
cycles in domestic investment. The electoral patterns in FDI flows
are more pronounced in countries with higher propensities for
policy reversals and when election outcomes are more uncertain. Our
identification strategy compares variation in different types of
capital flows into the same country around the timing of national
elections. The electoral cycles are present in relatively
irreversible FDI flows but not in foreign portfolio investment
flows, suggesting a likely causal link from political uncertainty
to and capital flows.
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