The Nonlinear Effect of Uncertainty in Portfolio Flows to Mexico

Abstract

Economic uncertainty is considered not only one of the main causes of recessions, but also a major obstacle to economic recovery. Recent studies find that significantly high levels of uncertainty could have a non-linear impact that amplifies the response of macroeconomic variables. The objective of this document is to analyze the presence of this impact on portfolio flows to Mexico. The results show that episodes of high uncertainty have a greater negative impact on bond and stock flows than those found under a linear VAR. Furthermore, it is observed that the effect is more persistent for bond flows. Finally, high uncertainty leads to a marked depreciation of the nominal exchange rate, a contraction in economic activity and a fall in the stock index.

A Framework for Systemwide Liquidity Analysis

“…Bush and Canon (2021) leveraged security level data for global mutual funds to explore the drivers of fund holdings of emerging market economy (EME) bonds. Vega (2021) attempted to analyze the effect of high uncertainty on portfolios flows to Mexico and found that high uncertainty leads to a marked depreciation of the nominal exchange rate, a contraction in economic activity and a fall in the stock index. Vega (2019) also explored the impact of foreign direct investment and portfolio flows on house price and found that that increase of both flows contributes to higher house price, although mortgage credit trumps these flow variables in terms of overall contribution to price dynamics.…”