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Political Risk and Capital Flight

Author

Listed:
  • 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.

Suggested Citation

  • Quan Le & Paul J. Zak, 2001. "Political Risk and Capital Flight," Claremont Colleges Working Papers 2001-10, Claremont Colleges.
  • Handle: RePEc:clm:clmeco:2001-10
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    File URL: http://www.claremontmckenna.edu/rdschool/papers/2001-10.pdf
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    References listed on IDEAS

    as
    1. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
    2. Michael P. Dooley & Peter Isard, 1978. "Capital controls, political risk and interest disparities," International Finance Discussion Papers 125, Board of Governors of the Federal Reserve System (U.S.).
    3. Clague, Christopher & Keefer, Philip & Knack, Stephen & Olson, Mancur, 1999. "Contract Intensive Money," MPRA Paper 25717, University Library of Munich, Germany.
    4. Eaton, Jonathan & Turnovsky, Stephen J, 1983. "Exchange Risk, Political Risk, and Macroeconomic Equilibrium," American Economic Review, American Economic Association, vol. 73(1), pages 183-189, March.
    Full references (including those not matched with items on IDEAS)

    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. 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.
    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. Ila Patnaik & Abhijit Sen Gupta & Ajay Shah, 2012. "Determinants of Trade Misinvoicing," Open Economies Review, Springer, vol. 23(5), pages 891-910, November.
    5. Luis F. Brunstein, 2008. "Policies to reduce instability," REVISTA DE ECONOMÍA DEL CARIBE 007100, UNIVERSIDAD DEL NORTE.

    More about this item

    Keywords

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

    JEL classification:

    • F3 - International Economics - - International Finance
    • P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism

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