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Three Essays on Capital Flight

Creative Commons 'BY' version 4.0 license

Consequent to developed and liberalized financial markets in emerging market economies, the magnitude of gross capital outflows is getting larger. My dissertation focuses on massive foreign asset purchases by domestic agents which is called capital flight and the study aims to see new empirical evidence on its impact and determinants and the associations between it and other macro variables using diverse methods in econometrics. In particular, I am interested in its role in emerging market economies since they are especially vulnerable to such large and unexpected capital flows.

First chapter investigates the impact of capital flight on domestic countries' real GDP growth and investment. Specifically, it employs diverse GMM estimators (difference, system, and orthogonal deviation GMM) to estimate their causal effects and uses interaction models to test the hypothesis that the effect of flights is conditional on the amount of external loans (gross capital inflows) in the country. The results show that flights are harmful only if there are not enough external loans and, otherwise, they fail to depress domestic economies. They are contrasted with those of capital inflow stops, which consistently decrease growth and, therefore, indicate inflow stops and outflow flights are different phenomena.

Second chapter estimates the impacts of domestic private saving and gross capital inflows on gross capital outflows in 56 emerging market economies over 1990 - 2014 using Powell's (2015) quantile regression methodology. The purpose is to test two hypotheses: first, capital outflows are mostly fueled by capital inflows rather than by domestic saving and, second, the causal impact of capital inflows is stronger in the upper quantiles of capital outflows. According to the result, the response of capital outflows to capital inflows and domestic saving is similar if capital outflows are below the median. However, if they are above the median, the impact of external loans is stronger than that of saving. Furthermore, a country tends to borrow from foreign countries to purchase debts rather than equities in the short run. It is consistent with several stylized facts such as pro-cyclical capital inflows and outflows and high leverage ratio and high probability of serial default and sudden stops during short-term booms.

Third chapter studies the association between extreme gross capital outflow movements (flight and retrenchment) and diverse financial crises (banking, currency, debt, and inflation crises) in 60 emerging markets between 1980 and 2009. Considering that the movements reflect domestic agents' strong preferences for (against) foreign assets, domestic turmoil might have affected or conversely been triggered by their behavior. In either case, large capital outflows are associated with crises and provide valuable information to both foreign interests and domestic policymakers. Results from the complementary log-log model show, first, that banking, currency, and inflation crises are associated with capital flight; second, debt crises are also associated with capital flight, but the result is not robust to different specifications; third, the positive association between capital flight and crises is mainly driven by banking flows rather than FDI and portfolio flows; and finally, capital retrenchment is not associated with any kind of crisis. The results support several arguments addressed in the existing literature, including the ``flight-to-safety" hypothesis and the self-fulfilling prophecy.

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