Ruhr Economic Papers

Ruhr Economic Papers #461

Uncertainty and Episodes of Extreme Capital Flows in the Euro Area

by Torsten Schmidt and Lina Zwick

RWI, 12/2013, 29 S./p., 8 Euro, ISBN 978-3-86788-521-8 DOI: 10.4419/86788521

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Abstract

During the Euro Area crisis huge changes in international capital flows occurred associated with a high level of economic uncertainty. While it is evident that both factors are able to trigger or amplify economic shocks posing a threat for economic activity it is a natural question whether they are related. The aim of this paper is to analyse the link between different measures of uncertainty and episodes of extreme capital flows for the core Euro Area countries using gross capital flows. We find that country-specific risk factors seem to play a more important role than global risk factors. Moreover, country-specific uncertainty seems to be more relevant for foreign direct investors.

JEL-Classification: F32, F21, G01

Keywords: Capital flows; uncertainty; Euro Area crisis; sudden stops; retrenchment

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