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Economic Impact of Capital Flight from Russia and its Institutional Context: Why Capital Controls cannot be a Part of a Pro- Growth Policy

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  • Denis Kadochnikov

    (Leontief Center - International Center for Social & Economic Research)

Abstract

The research presented in this paper is undertaken in response to the debate on capital flight from Russia. This debate usually involves discussion of its determinants but misses the question of its ultimate effects on the economy. Lack of understanding of the economic nature of capital flight and of its institutional context leads to numerous calls for a policy response, such as stricter capital controls, which are not grounded in any theory or empirical studies, but at the same time are not opposed on theoretical grounds, with only ideological or technical arguments employed at the very best. The purpose of the paper is to examine capital flight from Russia within the institutional environment in which it occurs and to establish whether this capital flight has detrimental effect on the economy. New Institutional Economics approach is adopted to argue that in Russia’s case capital flight might be considered not just a consequence, as some researchers have argued earlier, but also an optimal solution to the institutional deficiencies with its economic role being neutral. To support the validity of this claim modified Granger non-causality test is used to determine whether capital flight dynamics have a causal effect on that of the interest rate differential and vice versa, that is to test whether price mechanism is not working. Rethinking the nature and the economic impact of capital flight allows postulating that within the existing institutional context the observed capital flight is a normal economic process which per se does not require any policy response and restricting capital flight by imposing capital controls cannot be an element of a pro-growth policy, as it would instead lead to boom-burst sort of growth.

Suggested Citation

  • Denis Kadochnikov, 2005. "Economic Impact of Capital Flight from Russia and its Institutional Context: Why Capital Controls cannot be a Part of a Pro- Growth Policy," International Finance 0509007, EconWPA, revised 21 Sep 2005.
  • Handle: RePEc:wpa:wuwpif:0509007
    Note: Type of Document - pdf; pages: 19
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    Cited by:

    1. A. Yasemin Yalta, 2010. "Effect of Capital Flight on Investment: Evidence from Emerging Markets," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 46(6), pages 40-54, November.
    2. A. Yasemin Yalta, 2010. "Effect of Capital Flight on Investment: Evidence from Emerging Markets," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., vol. 46(6), pages 40-54, November.

    More about this item

    Keywords

    Russia; Capital Flight; New Institutional Economics;

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

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