Capital flight in the 1990s – lessons from E. Europe

Abstract

We analyze capital flight from Eastern Europe in the 1990s, a problem that although was as significant, and possibly as detrimental to economic growth, as its 1980s Latin American predecessor, has received scant attention in the literature so far. Specifically, we employ five capital-flight measures used in earlier studies and apply a “general to specific” modeling approach in a panel of seventeen E. European countries, trying to uncover the main determinants of the problem. Though these determinants differ across the estimated models, three appear consistently significant: real exchange rate appreciation, inflation and budget deficits. Lastly, we discuss the implications of the empirical findings for the IMF-sponsored economic stabilization programs.