Uncertainty and episodes of extreme capital flows in the Euro Area

- Foreign and domestic investors withdraw money from abroad during times of crises.
- Country-specific uncertainty is important for indicating large capital flow periods.
- Uncertainty is more relevant in stressed than in non-stressed Euro Area countries.
- The results reveal both a home bias and a safe haven effect.

During the Euro Area crisis contractions in international capital flows occurred along with a high level of economic uncertainty. While 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 EMU-12 countries using gross capital flows. We find that country-specific risk factors seem to play an important role in indicating periods of extreme capital flows. Moreover, country-specific uncertainty seems to be more relevant for foreign direct investors and for those in stressed countries of the Euro Area.