Does financial liberalization decrease capital flight? A panel causality analysis

We 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. Our 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. Our results suggest that financial liberalization policies per se may not be helpful in reducing capital flight.

► Financial liberalization and capital flight nexus are examined using a dynamic panel. ► Data from 21 emerging markets between 1980 and 2004 show no causal relationship. ► Financial liberalization per se may not be a solution to prevent capital flight.