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An econometric model of capital flight from developing countries

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Author Info
Lisa M. Schineller
Abstract

This 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.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 579.

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Date of creation: 1997
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Handle: RePEc:fip:fedgif:579

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Keywords: Capital movements ; Developing countries ; Econometric models;

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References listed on IDEAS
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.:
  1. 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. [Downloadable!] (restricted)
  2. Phylaktis, Kate, 1991. "The black market for dollars in Chile," Journal of Development Economics, Elsevier, vol. 37(1-2), pages 155-172, November. [Downloadable!] (restricted)
  3. Michael P. Dooley & Kenneth M. Kletzer, 1994. "Capital Flight, External Debt and Domestic Policies," NBER Working Papers 4793, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Hajivassiliou, V. A., 1989. "Do the secondary markets believe in life after debt?," Policy Research Working Paper Series 252, The World Bank. [Downloadable!]
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  5. Nouriel Roubini & Jeffrey Sachs, 1989. "Government Spending and Budget Deficits in the Industrial Economies," NBER Working Papers 2919, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Breusch, T S & Pagan, A R, 1980. "The Lagrange Multiplier Test and Its Applications to Model Specification in Econometrics," Review of Economic Studies, Blackwell Publishing, vol. 47(1), pages 239-53, January. [Downloadable!] (restricted)
  7. 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. [Downloadable!] (restricted)
  8. Griliches, Zvi & Hausman, Jerry A., 1986. "Errors in variables in panel data," Journal of Econometrics, Elsevier, vol. 31(1), pages 93-118, February. [Downloadable!] (restricted)
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  9. Guillermo Calvo & Carmen Reinhart & Leonardo Leiderman, 1993. "The Capital Inflows Problem: Concepts and Issues," IMF Policy Discussion Papers 93/10, International Monetary Fund.
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  10. 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. [Downloadable!] (restricted)
  11. Hausman, Jerry A. & Taylor, William E., 1981. "Panel data and unobservable individual effects," Journal of Econometrics, Elsevier, vol. 16(1), pages 155-155, May. [Downloadable!] (restricted)
  12. Calvo, Guillermo A & Leiderman, Leonardo, 1993. "The Capital Inflows Problem: Concepts and Issues," IMF Papers on Policy Analysis and Assessments 93/10, International Monetary Fund.
  13. 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. [Downloadable!] (restricted)
  14. 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. [Downloadable!]
  15. Claessens, Stijn & Naude, David, 1993. "Recent estimates of capital flight," Policy Research Working Paper Series 1186, The World Bank. [Downloadable!]
  16. Hausman, Jerry A & Taylor, William E, 1981. "Panel Data and Unobservable Individual Effects," Econometrica, Econometric Society, vol. 49(6), pages 1377-98, November. [Downloadable!] (restricted)
  17. 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. [Downloadable!] (restricted)
  18. R. Dornbusch, 1984. "External Debt, Budget Deficits and Disequilibrium Exchange Rates," Working papers 347, Massachusetts Institute of Technology (MIT), Department of Economics.
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  19. 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. [Downloadable!] (restricted)
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  20. Fishelson, Gideon, 1988. "The black market for foreign exchange : An international comparison," Economics Letters, Elsevier, vol. 27(1), pages 67-71. [Downloadable!] (restricted)
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  1. 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. [Downloadable!] (restricted)
    Other versions:
  2. 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. [Downloadable!] (restricted)
  3. Alexander Cobham, . "Capital Account Liberalisation and Poverty," QEH Working Papers qehwps70, Queen Elizabeth House, University of Oxford. [Downloadable!]
  4. 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.). [Downloadable!]
  5. 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. [Downloadable!]
  6. Collier, Paul & Hoeffler, Anke & Pattillo, Catherine, 1999. "Flight capital as a portfolio choice," Policy Research Working Paper Series 2066, The World Bank. [Downloadable!]
    Other versions:
  7. Andrew Powell & Dilip Ratha & Sanket Mohapatra, 2002. "Capital Inflows and Capital Outflows: Measurement, Determinants, Consequences," Business School Working Papers veinticinco, Universidad Torcuato Di Tella. [Downloadable!]
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