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Capital flight from the countries in transition: some theory and empirical evidence

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  • Nathan Sheets

Abstract

The first portion of this paper develops a simple framework that decomposes home demand for a domestic risky asset into a portfolio diversification incentive, a relative risk incentive, and a relative return incentive. It shows that capital flight may be caused by factors that increase the relative riskiness of the home asset or by structural distortions (such as financial sector inefficiency), which reduce the relative return of the domestic asset. The second portion of the paper provides empirical estimates of capital flight from Poland, Hungary, Czechoslovakia, and Russia for the 1988-93 period. The analysis concludes that the implementation of "shock therapy" reform programs has been accompanied by substantial capital flight. This has apparently occurred because such reform programs have initially generated increased economic and political uncertainty: prices have jumped toward world levels, property rights have been redistributed, and new institutions have been established. As these reform programs have progressed, however, the quantity of capital flight has declined. Hungary's experience is significantly different from that of the other three countries. Hungary pursued gradual reform and never experienced significant capital flight.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 514.

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Date of creation: 1995
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Handle: RePEc:fip:fedgif:514

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Related research

Keywords: Capital movements;

References

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  1. Steven B. Kamin & Neil R. Ericsson, 1993. "Dollarization in Argentina," International Finance Discussion Papers 460, Board of Governors of the Federal Reserve System (U.S.).
  2. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-58, December.
  3. Grossman, Sanford J. & Hart, Oliver D., 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Scholarly Articles 3450060, Harvard University Department of Economics.
  4. Michael P. Dooley, 1988. "Capital Flight: A Response to Differences in Financial Risks," IMF Staff Papers, Palgrave Macmillan, vol. 35(3), pages 422-436, September.
  5. Michael P. Dooley & Kenneth M. Kletzer, 1994. "Capital flight, external debt, and domestic policies," Economic Review, Federal Reserve Bank of San Francisco, pages 29-37.
  6. Michael Dooley & William Helkie & Ralph Tryon & John Underwood, 1983. "An analysis of external debt positions of eight developing countries through 1990," International Finance Discussion Papers 227, Board of Governors of the Federal Reserve System (U.S.).
  7. Roll, Richard & Solnik, Bruno, 1977. "A pure foreign exchange asset pricing model," Journal of International Economics, Elsevier, vol. 7(2), pages 161-179, May.
  8. Claessens, Stijn & Naude, David, 1993. "Recent estimates of capital flight," Policy Research Working Paper Series 1186, The World Bank.
  9. Alberto Giovannini & Bart Turtelboom, 1992. "Currency Substitution," NBER Working Papers 4232, National Bureau of Economic Research, Inc.
  10. David B. Gordon & Ross Levine, 1988. "The capital flight "problem."," International Finance Discussion Papers 320, Board of Governors of the Federal Reserve System (U.S.).
  11. Adler, Michael & Dumas, Bernard, 1976. "Portfolio Choice and the Demand for Forward Exchange," American Economic Review, American Economic Association, vol. 66(2), pages 332-39, May.
  12. Tornell, Aaron & Velasco, Andes, 1992. "The Tragedy of the Commons and Economic Growth: Why Does Capital Flow from Poor to Rich Countries?," Journal of Political Economy, University of Chicago Press, vol. 100(6), pages 1208-31, December.
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Citations

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Cited by:
  1. Brada, Josef C. & Kutan, Ali M. & Vukšić, Goran, 2013. "Capital Flight in the Presence of Domestic Borrowing: Evidence from Eastern European Economies," World Development, Elsevier, vol. 51(C), pages 32-46.
  2. Collier, Paul & Hoeffler, Anke & Pattillo, Catherine, 1999. "Flight capital as a portfolio choice," Policy Research Working Paper Series 2066, The World Bank.
  3. Hermes, Niels & Lensink, Robert & Murinde, Victor, 2002. "Flight Capital and its Reversal for Development Financing," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  4. Josef Brada & Ali Kutan & Goran Vukšić, 2011. "The costs of moving money across borders and the volume of capital flight: the case of Russia and other CIS countries," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 147(4), pages 717-744, November.
  5. Ljungwall, Christer & Wang, Zijian, 2008. "Why is capital flowing out of China?," China Economic Review, Elsevier, vol. 19(3), pages 359-372, September.
  6. Andrew Powell & Dilip Ratha & Sanket Mohapatra, 2002. "Capital Inflows and Capital Outflows: Measurement, Determinants, Consequences," Business School Working Papers veinticinco, Universidad Torcuato Di Tella.
  7. Marcella Mulino, 2002. "On the determinants of capital flight from Russia," Atlantic Economic Journal, International Atlantic Economic Society, vol. 30(2), pages 148-169, June.

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