Capital Flight: An Empirical Study on P.I.G.S

William Alexander McCaslin

Student thesis: Master thesis


The purpose of this thesis is to provide an empirical analysis on capital flight for Portugal, Italy, Greece and Spain (P.I.G.S) during the current euro zone debt crisis. This is a very popular topic in today’s media and provides a rare opportunity to study capital flight episodes in highly developed economies. Although the euro zone debt crisis is still ongoing, evidence of capital flight from these countries does exist and warrants examination. More importantly, this paper contributes to the current literature on the Target2 imbalances and their connection to capital flight. In order to provide a thorough discussion and analysis of capital flight, the following are discussed: • A comprehensive literature review focusing on capital flight episodes from all parts of the globe over the past twenty plus years. Capital flight estimates and the determinants for these capital flight flows are discussed and the major determinants are incorporated into the empirical analysis undertaken in this paper. • The three most popular capital flight estimation techniques including the World Bank Method, Hot Money (1-3) Method, and the Dooley Method. The potential downfall of the Dooley Method along with conflicting results from the World Bank method and Hot Money Method are discussed. • An empirical analysis using the most popular capital flight determinants from the literature. In addition, the Target2 balances of the central banks in the respective countries are examined as the development of these Target2 imbalances have become a hot debate among economists and European governments. The results of panel data regression analysis are presented and show that the current capital flight flows and determinants of the troubled P.I.G.S countries are fairly similar to previous capital flight episodes covered in the academic literature. Moreover, the empirical results differ depending on the capital flight estimation technique. Finally, capital flight estimates are shown to be correlated with Target2 liabilities and a significant contributing factor to these net Target2 imbalances.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2013
Number of pages86