Working Paper: NBER ID: w4793
Authors: Michael P. Dooley; Kenneth M. Kletzer
Abstract: It is now well documented that capital flight has been a dominant feature of capital movements between developing and industrial countries. Since 1988 reductions in the stock of flight capital more than account for private capital flows to emerging markets. This suggests that what appears to be a diversification of portfolios of residents of developed countries may be a restoration of 'home bias' in the portfolios of residents of developing countries. We show that changes in the stock of capital flight can increase or decrease welfare depending on the structure of distortionary taxes and subsidies on capital income and the effects of capital flight on the tax base.
Keywords: capital flight; external debt; domestic policies; welfare implications
JEL Codes: F21; F34; H21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| structure of taxation (H20) | capital flight (F21) |
| capital flight (F21) | welfare (I38) |
| capital flight (F21) | allocation of capital (G31) |
| market imperfections (D43) | allocation of capital (G31) |
| tax treatments (H25) | capital flows (F32) |