Capital Flight in the Presence of Domestic Borrowing: Evidence from Eastern European Economies

We estimate capital flight from 10 Central and Eastern European countries for the period 1996-2009. Capital flight from the transition economies is mainly an economic phenomenon, driven by differences in interest rates and investors' perceptions of economic conditions in their countries as well as by the ease with which they are able to obtain funds that can be transferred overseas through domestic loans and capital inflows. Domestic credit expansion is an important source of financing for capital flight. Paradoxically, financial liberalization has fueled rather than reduced capital flight by reducing its costs and increasing the funds that can be moved abroad.