US monetary policy uncertainty and the capital flow waves

Is US monetary policy uncertainty (US MPU) associated with waves of capital flows? Global risk and economic policy uncertainty are associated with capital flows, but less is known about how the US MPU drives capital movements. We investigate the effects of the US MPU on the waves of capital flows in 48 economies (more and less financially open) over the period 1986q2–2018q4. We find that an increase in the US MPU decreases the likelihood of flight and increases the probability of retrenchment. However, countries with capital controls and floating exchange rate systems are successful in mitigating the waves of capital flows. Our findings suggest the US MPU is an important driver of capital flows as per the real options channel. An important implication is that capital controls may be more effective than floating exchange rate systems in managing capital flows amid US monetary policy uncertainty.