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

  • Nathan Sheets

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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File URL: http://www.federalreserve.gov/pubs/ifdp/1995/514/default.htm
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File URL: http://www.federalreserve.gov/pubs/ifdp/1995/514/ifdp514.pdf
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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 514.

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Date of creation: 1995
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Handle: RePEc:fip:fedgif:514
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  1. Oliver Hart & Sanford Grossman, 1985. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Working papers 372, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Dooley, Michael & Helkie, William & Tryon, Ralph & Underwood, John, 1986. "An analysis of external debt positions of eight developing countries through 1990," Journal of Development Economics, Elsevier, vol. 21(2), pages 283-318, May.
  3. Roll, Richard & Solnik, Bruno, 1977. "A pure foreign exchange asset pricing model," Journal of International Economics, Elsevier, vol. 7(2), pages 161-179, May.
  4. Alberto Giovannini & Bart Turtelboom, 1992. "Currency Substitution," NBER Working Papers 4232, National Bureau of Economic Research, Inc.
  5. Michael P. Dooley & Kenneth M. Kletzer, 1994. "Capital Flight, External Debt and Domestic Policies," NBER Working Papers 4793, National Bureau of Economic Research, Inc.
  6. 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.
  7. 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.
  8. Claessens, Stijn & Naude, David, 1993. "Recent estimates of capital flight," Policy Research Working Paper Series 1186, The World Bank.
  9. Oliver Hart & John Moore, 1988. "Property Rights and the Nature of the Firm," Working papers 495, Massachusetts Institute of Technology (MIT), Department of Economics.
  10. 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.).
  11. 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.
  12. 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.).
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