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Political Risk and Capital Flight

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Author Info

  • Quan Le

    (Claremont Graduate University)

  • Paul J. Zak

    (Claremont Graduate University)

Abstract

Capital 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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File URL: http://www.claremontmckenna.edu/rdschool/papers/2001-10.pdf
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Bibliographic Info

Paper provided by Claremont Colleges in its series Claremont Colleges Working Papers with number 2001-10.

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Date of creation: May 2001
Date of revision:
Handle: RePEc:clm:clmeco:2001-10

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Related research

Keywords: capital flight; political risk; policy risk; portfolio choice;

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References

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  1. Clague, Christopher & Keefer, Philip & Knack, Stephen & Olson, Mancur, 1999. "Contract Intensive Money," MPRA Paper 25717, University Library of Munich, Germany.
  2. Eaton, Jonathan & Turnovsky, Stephen J, 1983. "Exchange Risk, Political Risk, and Macroeconomic Equilibrium," American Economic Review, American Economic Association, vol. 73(1), pages 183-89, March.
  3. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
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Citations

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Cited by:
  1. Martínez, Juan & Santiso, Javier, 2003. "Financial Markets and Politics: The Confidence Game in Latin American Emerging Economies," MPRA Paper 12909, University Library of Munich, Germany.
  2. Patnaik, Ila & Gupta, Abhijit Sen & Shah, Ajay, 2010. "Determinants of Trade Misinvoicing," Working Papers 10/75, National Institute of Public Finance and Policy.
  3. David Fielding & Anja Shortland, 2005. "How does political violence affect confidence in a local currency? Evidence from Egypt," Journal of International Development, John Wiley & Sons, Ltd., vol. 17(7), pages 841-866.
  4. Quan V. Le, 2004. "Political and economic determinants of private investment," Journal of International Development, John Wiley & Sons, Ltd., vol. 16(4), pages 589-604.
  5. Luis F. Brunstein, 2008. "Policies to reduce instability," REVISTA DE ECONOMÍA DEL CARIBE, UNIVERSIDAD DEL NORTE.

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