An econometric model of capital flight from developing countries
AbstractThis paper analyzes capital flight from a group of seventeen developing nations over the period 1978 to 1993. The paper briefly discusses several empirical definitions of capital flight and presents estimates of capital flight for the sample based on some of these measures. In general, the data reveal periodic episodes of dramatic flight through the late 1980s, at which point many nations began to experience strong capital inflows. Anecdotal evidence for the nations in our sample underpins our hypothesis that capital flight is driven by a heightened, pervasive risk which reflects the degree of domestic macroeconomic imbalance which is domestically undiversifiable. Our econometric model of the determinants of capital flight extends previous empirical studies of flight by expanding both the cross section of nations and time horizon of analysis. Given the panel data set, we consider a country specific error component to account for the possibility of unobserved country heterogeneity and employ fixed- effects and random-effects estimation. We instrument for potentially endogenous explanatory variables and in doing so consider a fixed-effects system. The results, based on several different measures of flight, highlight the importance of modelling flight with a country specific error component. While other proxies of the risk associated with macroeconomic imbalance are not significant, the central government surplus is negatively, statistically significantly related to flight. This highlights the motivation of investors to move capital both to escape future taxation directly and indirectly via monetization of deficits. Therefore, even when taking into account other measures of risk, the higher taxation risk, both directly and indirectly through expectations of future inflation, dominates the regressions.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 579.
Date of creation: 1997
Date of revision:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Vassilis A. Hajivassiliou, 1989.
"Do the Secondary Markets Believe in Life After Debt?,"
Cowles Foundation Discussion Papers
911, Cowles Foundation for Research in Economics, Yale University.
- Hajivassiliou, V. A., 1989. "Do the secondary markets believe in life after debt?," Policy Research Working Paper Series 252, The World Bank.
- 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.
- Roubini, Nouriel & Sachs, Jeffrey D., 1989. "Political and economic determinants of budget deficits in the industrial democracies," European Economic Review, Elsevier, vol. 33(5), pages 903-933, May.
- Fishelson, Gideon, 1988. "The black market for foreign exchange : An international comparison," Economics Letters, Elsevier, vol. 27(1), pages 67-71.
- R. Dornbusch, 1984.
"External Debt, Budget Deficits and Disequilibrium Exchange Rates,"
347, Massachusetts Institute of Technology (MIT), Department of Economics.
- Rudiger Dornbusch, 1986. "External Debt, Budget Deficits and Disequilibrium Exchange Rates," NBER Working Papers 1336, National Bureau of Economic Research, Inc.
- Michael P. Dooley & Kenneth M. Kletzer, 1994.
"Capital flight, external debt, and domestic policies,"
Federal Reserve Bank of San Francisco, pages 29-37.
- Michael P. Dooley & Kenneth M. Kletzer, 1994. "Capital Flight, External Debt and Domestic Policies," NBER Working Papers 4793, National Bureau of Economic Research, Inc.
- Willem H. Buiter, 1988.
"Some Thoughts on the Role of Fiscal Policy in Stabilisation and Structural Adjustment in Developing Countries,"
NBER Working Papers
2603, National Bureau of Economic Research, Inc.
- Buiter, W.H., 1988. "Some Thoughts On The Role Of Fiscal Policy In Stabilisation And Structural Adjustment In Developing Countries," Papers 312, London School of Economics - Centre for Labour Economics.
- Buiter, Willem H, 1988. "Some Thoughts on the Role of Fiscal Policy in Stabilization and Structural Adjustment in Developing Countries," CEPR Discussion Papers 260, C.E.P.R. Discussion Papers.
- Agenor, Pierre-Richard & Taylor, Mark P, 1993. "Analysing Credibility in High-Inflation Countries: A New Approach," Economic Journal, Royal Economic Society, vol. 103(417), pages 329-36, March.
- Hsiao,Cheng, 2003.
"Analysis of Panel Data,"
Cambridge University Press, number 9780521522717, December.
- Breusch, T S & Pagan, A R, 1980.
"The Lagrange Multiplier Test and Its Applications to Model Specification in Econometrics,"
Review of Economic Studies,
Wiley Blackwell, vol. 47(1), pages 239-53, January.
- Breusch, T.S. & Pagan, A.R., . "The Lagrange multiplier test and its applications to model specification in econometrics," CORE Discussion Papers RP -412, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Claessens, Stijn & Naude, David, 1993. "Recent estimates of capital flight," Policy Research Working Paper Series 1186, The World Bank.
- Hausman, Jerry A. & Taylor, William E., 1981.
"Panel data and unobservable individual effects,"
Journal of Econometrics,
Elsevier, vol. 16(1), pages 155-155, May.
- Phylaktis, Kate, 1991. "The black market for dollars in Chile," Journal of Development Economics, Elsevier, vol. 37(1-2), pages 155-172, November.
- Nouriel Roubini & Jeffrey Sachs, 1989. "Government Spending and Budget Deficits in the Industrial Economies," NBER Working Papers 2919, National Bureau of Economic Research, Inc.
- Dornbusch, Rudiger, et al, 1983. "The Black Market for Dollars in Brazil," The Quarterly Journal of Economics, MIT Press, vol. 98(1), pages 25-40, February.
- Michael P. Dooley & Eduardo Fernandez-Arias & Kenneth M. Kletzer, 1994. "Recent Private Capital Inflows to Developing Countries: Is the Debt Crisis History?," NBER Working Papers 4792, National Bureau of Economic Research, Inc.
- Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1992. "Capital Inflows and Real Exchange Rate Appreciation in Latin America," MPRA Paper 13843, University Library of Munich, Germany.
- Zvi Griliches & Jerry A. Hausman, 1984.
"Errors in Variables in Panel Data,"
NBER Technical Working Papers
0037, National Bureau of Economic Research, Inc.
- Mark R. Stone, 1991. "On the Information Content of LDC Secondary Loan Market Prices," IMF Working Papers 91/20, International Monetary Fund.
- Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1994.
"The capital inflows problem: Concepts and issues,"
13902, University Library of Munich, Germany.
- D. F. I. Folkerts-Landau & Donald J. Mathieson & Morris Goldstein & Liliana Rojas-SuÃ¡rez & JosÃ© SaÃºl Lizondo & Timothy D. Lane, 1991. "Determinants and Systemic Consequences of International Capital Flows," IMF Occasional Papers 77, International Monetary Fund.
- Nouriel Roubini & Jeffrey Sachs, 1988. "Political and Economic Determinants of Budget Deficits in the IndustrialDemocracies," NBER Working Papers 2682, National Bureau of Economic Research, Inc.
- repec:imf:imfpdp:9310 is not listed on IDEAS
- 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.
- Bacchetta, Philippe & van Wincoop, Eric, 1998.
"Capital Flows to Emerging Markets: Liberalization, Overshooting and Volatility,"
CEPR Discussion Papers
1889, C.E.P.R. Discussion Papers.
- Philippe Bacchetta & Eric van Wincoop, 2000. "Capital Flows to Emerging Markets: Liberalization, Overshooting, and Volatility," NBER Chapters, in: Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies, pages 61-98 National Bureau of Economic Research, Inc.
- Philippe Bacchetta & Eric van Wincoop, 1998. "Capital flows to Emerging Markets: Liberalization, Overshooting, and Volatility," Working Papers 98.01, Swiss National Bank, Study Center Gerzensee.
- Philippe Bacchetta & Eric van Wincoop, 1998. "Capital Flows to Emerging Markets: Liberalization, Overshooting, and Volatility," NBER Working Papers 6530, National Bureau of Economic Research, Inc.
- Andrew Powell & Dilip Ratha & Sanket Mohapatra, 2002. "Capital Inflows and Capital Outflows: Measurement, Determinants, Consequences," Business School Working Papers veinticinco, Universidad Torcuato Di Tella.
- Augusto de la Torre & Sergio L. Schmukler, 2007. "Emerging Capital Markets and Globalization : The Latin American Experience," World Bank Publications, The World Bank, number 7187, March.
- Alexander Cobham, . "Capital Account Liberalisation and Poverty," QEH Working Papers qehwps70, Queen Elizabeth House, University of Oxford.
- Alejandro Diaz-Bautista & Cesar Alfredo Olivas Andrade, 2005. "Un Análisis de cointegración con corrección de errores de las Fugas de Capital y la Inestabilidad Política en México , An econometric model of capital flight in Mexico," International Finance 0511004, EconWPA.
- Lisa M. Schineller, 1997. "A nonlinear econometric analysis of capital flight," International Finance Discussion Papers 594, Board of Governors of the Federal Reserve System (U.S.).
- Kamin, Steven B. & Ericsson, Neil R., 2003. "Dollarization in post-hyperinflationary Argentina," Journal of International Money and Finance, Elsevier, vol. 22(2), pages 185-211, April.
- Collier, Paul & Hoeffler, Anke & Pattillo, Catherine, 1999.
"Flight capital as a portfolio choice,"
Policy Research Working Paper Series
2066, The World Bank.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kris Vajs).
If references are entirely missing, you can add them using this form.