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Does Financial Liberalization Decrease Capital Flight? A Panel Causality Analysis

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Executive Summary

The authors employ a panel causality approach in order to examine whether financial liberalization affects the magnitude of capital flight, which measures unrecorded accumulation of foreign assets by the private sector. The data from 21 emerging market economies for the period between 1980 and 2004 show no significant evidence of a causal relationship. Lagged values of capital flight, however, seem to increase its current level, indicating its self-reinforcing characteristic. Their results suggest that financial liberalization policies per se may not be helpful in reducing capital flight.

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