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Role of instability in affecting capital flight magnitude: An ARDL bounds testing approach

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  • Hasnul, Al Gifari
  • Masih, Mansur

Abstract

Capital flight resulting from hot money has been a popular issue recently. The effect of capital flight is unquestionably bad to the domestic economic condition. The current global economic slowdown exposes a bigger risk of capital flight to developing countries. Likewise, the causal relationship of capital flight and political stability as well as exchange rate stability is not clearly observed yet in the literature. This paper aims to analyse this issue and fill the research gap. Our paper extends previous studies by using another measure of political risk index, and also exchange rate stability has not been really examined by previous studies in the case of capital flight. A more focused study on one country may give a direct policy implication to the policymakers of the country, rather than a panel data study. We employed time-series data of Indonesia for 35 years from 1980 to 2015 and use ARDL procedure, which is really suitable for our research objectives and sample used, to analyse the data. We find that political risk plays a significant role in affecting the magnitude of capital flight. Furthermore, the results show that both capital flight and exchange rate stability are endogenous variables, and movement in one variable will affect the movement of another variable. Our main suggestion for the policy makers to prevent capital flight is to maintain political and exchange rate stability in the country. In short, preventing capital flight is all about maintaining domestic stability, either political stability or economic stability.

Suggested Citation

  • Hasnul, Al Gifari & Masih, Mansur, 2016. "Role of instability in affecting capital flight magnitude: An ARDL bounds testing approach," MPRA Paper 72086, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:72086
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    References listed on IDEAS

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    Cited by:

    1. Mercy W. Mwangi & Amos G. Njuguna & George O. Achoki, 2019. "Relationship between corruption and capital flight in Kenya: 1998-2018," International Journal of Research in Business and Social Science (2147-4478), Center for the Strategic Studies in Business and Finance, vol. 8(5), pages 237-250, September.
    2. Nirmol Chandra Das & Mohammad Ashraful Ferdous Chowdhury & Md. Nazrul Islam, 2021. "Nonlinear Threshold Effects of Institutional Quality on Capital Flight: Insights From Bangladesh," International Journal of Asian Business and Information Management (IJABIM), IGI Global, vol. 12(1), pages 43-59, January.

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    More about this item

    Keywords

    Capital Flight; Political Stability; Exchange Rate Stability; ARDL bounds tests;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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