Causes and Consequences of Capital Flight in Indonesia: A VAR Model Approach

Abstract

This study examines the dynamic relationship between corruption and capital flight in Indonesia over the period from 2000 to 2022. Using a Vector Autoregression (VAR) framework, the research investigates the interactions among six important variables: Corruption Index, Capital Flight, Interest Rate, Exchange Rate, GDP Growth Rate, and Inflation Rate. In the model specification, corruption is positioned as the key driver of changes in the system, while capital flight serves as the primary transmission channel linking institutional weaknesses to financial instability and real sector outcomes.

The research begins by contextualizing capital flight within Indonesia’s political-economic landscape, where volatility, governance challenges, and external shocks have historically triggered episodes of financial outflows. Building on an extensive review of theoretical frameworks and empirical studies, the study identifies both economic and institutional factors that may influence capital flight, ranging from interest rate differentials and inflationary expectations to perceptions of political risk and corruption.

The study contributes to the broader literature on the role of institutions in shaping financial outcomes by demonstrating that corruption is not merely a political or ethical issue but a serious economic risk. In the Indonesian context, weak institutional quality can trigger financial outflows, destabilize monetary conditions, and slow down real economic growth. The findings suggest that improving governance is essential not only for ethical governance but also for financial stability and long-term economic resilience. Stronger institutional frameworks could help mitigate the risks associated with capital flight and strengthen Indonesia’s external position. Future research could build on this study by exploring sector-specific dynamics of capital flight, distinguishing between private and public-sector outflows, or extending the analysis to comparative studies across other emerging economies facing similar institutional challenges. 

Keywords: Vector Autoregression, Capital Flight, Political Instability, Corruption Perception Index

Keywords: Vector Autoregression, Capital Flight, Political Instability, Corruption Perception Index