Elections Matter: Capital Flows and Political Cycles

IMF Working Papers, November 14, 2025

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The paper examines the impact of political uncertainty, proxied by elections, on international capital flows to emerging market economies.
Using quarterly data for a panel of 38 emerging market economies from 1990 to 2020, the authors find that periods surrounding elections are associated with a decline in gross private capital inflows.
The adverse impact is larger and more persistent when uncertainty extends beyond the election period (for example, when incumbent’s loss creates uncertainty about policy priorities).
Higher levels of overall political stability appear to mitigate the adverse effects of elections on capital flows.
Stronger institutions—reflected in indicators such as regulatory quality and rule of law—help to mitigate the adverse effects of political uncertainty on capital flows.
Results are robust across a range of alternative specifications, including controls for standard economic drivers of capital flows, election characteristics, and model assumptions.

Empirical framework: elections incorporated as a proxy for political uncertainty within a standard push-pull framework for analyzing capital flows.
Data: quarterly frequency; panel of 38 emerging market economies; sample period 1990 to 2020.
Outcome variable emphasized: gross private capital inflows.
Controls included: standard economic drivers of capital flows and election characteristics (specific controls not enumerated on the page).

Election periods are associated with declines in gross private capital inflows.
The negative effect is:
- Larger when political uncertainty persists beyond the immediate election period.
- More persistent in contexts of incumbent loss and associated uncertain policy priorities.
Institutional and political environment interactions:
- Higher overall political stability mitigates adverse election effects.
- Stronger institutions (regulatory quality, rule of law) mitigate adverse election effects.

The core results remain robust to:
- A range of alternative model specifications.
- Inclusion of controls for standard economic drivers of capital flows.
- Variation in election characteristics.
- Alternative model assumptions.

Policies that enhance political stability can reduce election-related capital flow volatility.
Strengthening institutional quality—improving regulatory quality and the rule of law—can mitigate adverse capital flow responses to political uncertainty.
Reducing post-election policy uncertainty (for example, through clearer policy commitments or transition arrangements) may lessen the persistence and magnitude of election-related capital outflows.

Source: IMF Working Paper “Elections Matter: Capital Flows and Political Cycles” by Maria Arakelyan and Tatiana Evdokimova.