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The Intriguing Nexus Between Corruption and Capital Account Restrictions

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  • Axel Dreher
  • Lars Siemers

Abstract

The paper develops a theoretical model showing a mutual relationship between corruption and capital account restrictions. According to the model, higher corruption induces stricter restrictions and vice versa. We test the model using panel data for 112 countries over the period 1984-2002 and find that corruption and restrictions are indeed mutually determined. Estimating the model simultaneously, capital account restrictions induce higher corruption. Higher corruption, in turn, is associated with more restrictions on the capital account. The empirical relationship is, however, not completely robust.

Suggested Citation

  • Axel Dreher & Lars Siemers, 2005. "The Intriguing Nexus Between Corruption and Capital Account Restrictions," KOF Working papers 05-113, KOF Swiss Economic Institute, ETH Zurich.
    • Handle: RePEc:kof:wpskof:05-113
    DOI: 10.3929/ethz-a-005104867
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    3. Axel Dreher & Jan-Egbert Sturm & Heinrich Ursprung, 2008. "The impact of globalization on the composition of government expenditures: Evidence from panel data," Public Choice, Springer, vol. 134(3), pages 263-292, March.
    4. Martin Gassebner & Alexander Keck & Robert Teh, 2010. "Shaken, Not Stirred: The Impact of Disasters on International Trade," Review of International Economics, Wiley Blackwell, vol. 18(2), pages 351-368, May.
    5. Friedrich Schneider & Friedrich Schneider, 2008. "Shadow Economies and Corruption all over the World: What do we Really Know?," Chapters, in: Michael Pickhardt & Edward Shinnick (ed.), The Shadow Economy, Corruption and Governance, chapter 7, pages 122-187, Edward Elgar Publishing.
    6. Aizenman, Joshua & Noy, Ilan, 2006. "FDI and trade--Two-way linkages?," The Quarterly Review of Economics and Finance, Elsevier, vol. 46(3), pages 317-337, July.
    7. Axel Dreher & Friedrich Schneider, 2010. "Corruption and the shadow economy: an empirical analysis," Public Choice, Springer, vol. 144(1), pages 215-238, July.
    8. Axel Dreher & Bernhard Herz & Volker Karb, 2006. "Is there a causal link between currency and debt crises?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 11(4), pages 305-325.
    9. Schupp, Claudia & Wache, Benjamin, 2014. "Wie groß ist der Einfluss von deutschen Wirtschaftsforschungsinstituten? Ein Ranking anhand von RePEc-Daten [How large is the influence of German economic research institutes? A ranking analysis us," MPRA Paper 55519, University Library of Munich, Germany.
    10. Joshua Aizenman & Ilan Noy, 2003. "Endogenous Financial Openness: Efficiency and Political Economy Considerations," NBER Working Papers 10144, National Bureau of Economic Research, Inc.
    11. Schneider, Friedrich G., 2007. "Shadow Economies and Corruption All Over the World: New Estimates for 145 Countries," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 1, pages 1-66.
    12. De Santis, Roberto A. & Lührmann, Melanie, 2009. "On the determinants of net international portfolio flows: A global perspective," Journal of International Money and Finance, Elsevier, vol. 28(5), pages 880-901, September.
    13. Anders Olofsgård & Zaki Zahran, 2008. "Corruption And Political And Economic Reforms: A Structural Breaks Approach," Economics and Politics, Wiley Blackwell, vol. 20(2), pages 156-184, June.
    14. Dreher, Axel & Kotsogiannis, Christos & McCorriston, Steve, 2007. "Corruption around the world: Evidence from a structural model," Journal of Comparative Economics, Elsevier, vol. 35(3), pages 443-466, September.
    15. Schneider, Friedrich G. & Buehn, Andreas, 2009. "Shadow economies and corruption all over the world: revised estimates for 120 countries," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 1, pages 1-53.
    16. Markus Leibrecht & Claudia Hochgatterer, 2012. "Tax Competition As A Cause Of Falling Corporate Income Tax Rates: A Survey Of Empirical Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 26(4), pages 616-648, September.
    17. Joshua Aizenman & Ilan Noy, 2008. "Links between Trade and Finance: A Disaggregated Analysis," NBER Chapters, in: Financial Markets Volatility and Performance in Emerging Markets, pages 9-28, National Bureau of Economic Research, Inc.
    18. De Santis, Roberto A. & Lührmann, Melanie, 2006. "On the determinants of external imbalances and net international portfolio flows: a global perspective," Working Paper Series 651, European Central Bank.
    19. Hartwell, Christopher A., 2011. "All That’s Old is New Again: Capital Controls and the Macroeconomic Determinants of Entrepreneurship in Emerging Markets," MPRA Paper 40257, University Library of Munich, Germany.
    20. Axel Dreher & Thomas Herzfeld, 2005. "The Economic Costs of Corruption: A Survey and New Evidence," Public Economics 0506001, University Library of Munich, Germany.
    21. Becerra, O. & Cavallo, E. & Scartascini, C., 2012. "The politics of financial development: The role of interest groups and government capabilities," Journal of Banking & Finance, Elsevier, vol. 36(3), pages 626-643.
    22. Axel Dreher, 2006. "Does globalization affect growth? Evidence from a new index of globalization," Applied Economics, Taylor & Francis Journals, vol. 38(10), pages 1091-1110.
    23. Gassebner, Martin & Keck, Alexander & Teh, Robert, 2006. "The impact of disasters on international trade," WTO Staff Working Papers ERSD-2006-04, World Trade Organization (WTO), Economic Research and Statistics Division.
    24. Joshua Aizenman & Ilan Noy, 2004. "Endogenous Financial and Trade Openness: Efficiency and Political Economy Considerations," Working Papers 200404, University of Hawaii at Manoa, Department of Economics.

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    More about this item

    Keywords

    Corruption; Capital account restrictions; Dynamic panel;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • D19 - Microeconomics - - Household Behavior - - - Other
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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