Capital Flight and Institutional Quality: What’s the Optimum Level?

Have you ever wondered what might be the ‘optimum or threshold level of institutional quality that would create a milieu of least possible capital flight?’

Quite topical given monetary tightening, higher financing costs, and slower growth/recession prospects. 

Using Bangladesh as a case study – along with ICRG and WGI governance data over the period 1989 to 2016 – this interesting piece used a nonlinear regression to show that, ‘up to certain threshold level of institutional quality, interest rate differential reduces while economic growth stimulates net capital flight (NCF). Additionally, up to a certain threshold, level of corruption and interest rate differential lower NCF while beyond that level no effect exists. However, none of those independent variables affects NCF whenever the role of government stability threshold is considered.’


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