Political Risk and Capital Flight
AbstractCapital flight often amounts to a substantial proportion of GDP when developing countries face crises. This paper presents a portfolio choice model that relates capital flight to rate of return differentials, risk aversion, and three types of risk: financial risk, political risk, and policy risk. Estimating the equilibrium capital flight equation for a panel of 47 developing countries over 16 years, we show that all three types of risk have a statistically significant impact on capital flight. Quantitatively, political risk is the most important factor causing capital flight. We also identify several political factors that reduce capital flight by signaling market-oriented reforms are imminent.
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Bibliographic InfoPaper provided by Claremont Colleges in its series Claremont Colleges Working Papers with number 2001-10.
Date of creation: May 2001
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More information through EDIRC
capital flight; political risk; policy risk; portfolio choice;
Find related papers by JEL classification:
- F3 - International Economics - - International Finance
- P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism
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