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An econometric model of capital flight from developing countries

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  • 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.

Suggested Citation

  • Lisa M. Schineller, 1997. "An econometric model of capital flight from developing countries," International Finance Discussion Papers 579, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:579
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Augusto de la Torre & Sergio Schmukler, 2007. "Emerging Capital Markets and Globalization: The Latin American Experience," IDB Publications (Books), Inter-American Development Bank, number 349, March.
    2. 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.
    3. Anke Hoeffler & Catherine A Pattillo & Paul Collier, 1999. "Flight Capital as a Portfolio Choice," IMF Working Papers 99/171, International Monetary Fund.
    4. 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.
    5. Marcella Mulino, 2002. "On the determinants of capital flight from Russia," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 30(2), pages 148-169, June.
    6. 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.).
    7. Alexander Cobham, "undated". "Capital Account Liberalisation and Poverty," QEH Working Papers qehwps70, Queen Elizabeth House, University of Oxford.
    8. Andrew Powell & Dilip Ratha & Sanket Mohapatra, 2002. "Capital Inflows and Capital Outflows: Measurement, Determinants, Consequences," Business School Working Papers veinticinco, Universidad Torcuato Di Tella.
    9. 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.
    10. 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, September.

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