Financial Development and Capital Flight: Is the Association Non-Linear?

Abstract

The paper revisits the relationship between capital flight and financial development. Previous research has focused on a linear relationship between the two variables. Using a broad panel of 107 middle income and low income economies, the results reveal that a non-linear association exists between financial development and capital flight. The impact of financial development on capital flight depends on the level of financial development. Financial development triggers capital flight for countries at intermediate and higher levels of financial development, but the impact of financial development on capital flight is negative for sufficiently higher levels. The results are robust with alternate specifications, additional control variables and alternative measures of financial development.

Keywords: Capital Flight, Financial Development, Low- and Middle- Income Countries

JEL Classification: F39, 016