Economic Policy Uncertainty and Foreign Capital Flows Dynamics: Accounting for Asymmetry and Multiple Structural Breaks in Panel Framework

Abstract

Given the paucity of studies that provide understanding of the reaction of foreign capital flows to rising and falling economic policy uncertainty (EPU) in Sub-Saharan Africa (SSA), and the need to account for structural breaks to deal with the issue of wrong inference in stationarity tests which is currently lacking in previous studies, this study assessed: the asymmetrical reaction of diverse foreign capital flows to positive and negative EPU amongst countries in SSA. The novel panel nonlinear autoregressive distributed lag (PNARDL) and the cross-sectionally augmented autoregressive distributed lag (CS-ARDL), as well as pooled mean-group (PMG) estimation procedures were utilized in the analysis. Based on the quarterly longitudinal data for 23 SSA nations over the period of 2000Q1–2022Q4, the following outcomes are made. First, high levels of country-specific EPU degrades the region’s diverse flows of capital significantly both in the short-run and long-run; second, the world-based EPU largely improves the region’s flows of capital, particularly total flows and foreign direct investment (FDI) flows; third, there is an asymmetric link between the investigated series; fourth, an elevated country-specific EPU worsens the region’s diverse foreign flows of capital, but a reduction in it only reverses a small fraction of the devastating effects of increased EPU on the region’s foreign capital flows. This upholds the ratchet effect supposition. The policy recommendations from the main discoveries have been suggested.