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Laurence M. Ball, Mr. Nicolas de Roux Uribe, and Mr. Marc Hofstetter
JEL Cl This study constructs a new data set on unemployment rates in Latin America and the Caribbean and then explores the determinants of unemployment. We compare different countries, finding that unemployment is influenced by the size of the rural population and that the effects of government regulations are generally weak. We also examine large, persistent increases in unemployment over time, finding that they are caused by contractions in aggregate demand. These demand contractions result from either disinflationary monetary policy or the defense of an exchange - rate peg in the face of capital flight. Our evidence supports hysteresis theories in which short - run changes in unemployment influence the natural rate.
International Monetary Fund. External Relations Dept.

Economist at the World Bank, and others urged a reversal of the standard IMF prescription that a country facing a currency crisis temporarily raise its interest rates to stem currency devaluation and restore financial stability. Raising interest rates would worsen the condition of corporate balance sheets, these IMF critics argued, prompting further capital flight and weakening the currency. Hence, far from defending the currency, interest rate increases could have the “perverse” impact of further currency depreciation. Results of the IMF strategy in Asia appear to

International Monetary Fund. Research Dept.

temporarily to stem currency devaluation and to restore financial stability. This group of economists argued that raising interest rates would worsen the condition of corporate balance sheets, thus, prompting further capital flight and weakening the currency. Far from defending the currency, interest rate increases could instead have the “perverse” impact of depreciating the exchange rate. Should this warning of a perverse impact be taken seriously? Several papers at the conference addressed this question. For the Asian crisis countries, Atish Ghosh and Gabriela

International Monetary Fund. Legal Dept., International Monetary Fund. Monetary and Capital Markets Department, International Monetary Fund. Strategy, Policy, &, Review Department, and International Monetary Fund. Research Dept.

subsidization of further capital flight) (i) Resource misallocation and distortions in growth, (ii) postponement of the necessary macroeconomic adjustment Philippines 1951–65 Exchange tax of 10–17 percent levied on the peso value of sales of foreign exchange Raising revenue / market structure purpose (monitoring the demand for imports) (i) Protective effects on specific industries, (ii) deterrent to exports which contain imported materials, (iii) tax incidence on importers and pass-through on consumption prices, (iv) deterrent to foreign investment

Anke Hoeffler, Ms. Catherine A Pattillo, and Mr. Paul Collier
This paper sets flight capital in the context of portfolio choice, focusing upon the proportion of private wealth that is held abroad. There are large regional differences in this proportion, ranging from 5 percent in South Asia to 40 percent in Africa. We explain cross-country differences in portfolio choice by variables that proxy differences in the risk-adjusted rate of return on capital. We apply the results to four policy questions: how the East Asian crisis affected domestic capital outflows; herd effects; the effect of the IMF-World Bank debt relief initiative for heavily-indebted poor countries (HIPC) on capital repatriation; and why so much of Africa’s private wealth is held outside the continent.
Anke Hoeffler, Ms. Catherine A Pattillo, and Mr. Paul Collier

the herding notion that as capital flight increases, the incentives for further capital flight increase. We can explore this notion using a quantile regression approach. By calculating regressions for different quantiles, it is possible to examine the shape of the conditional distribution of capital flight shares. Our particular interest is whether there are differences in the determinants of capital flight at the low and high end of the conditional distribution of capital flight shares. Quantile regressions are defined by minimizing the absolute sum of the errors

Mr. Michael Deppler and Martin Williamson

intermediation is again likely to raise public sector borrowing costs. Capital flight is also likely to lead to an erosion of the tax base because it removes resources from the government’s tax jurisdiction, and thereby weakens public revenues. Further, capital flight may have led the public sector to undertake a larger share of investment than it might otherwise have done. Because the internationalization of intermediation tended to result in increases in private foreign claims offset by increases in public liabilities, the share of domestic investment controlled by the

International Monetary Fund. External Relations Dept.
Following are edited excerpts from IMF Managing Director Horst Köhler’s remarks, as prepared for delivery at the conference “Completing Transition: The Main Challenges,” held in Vienna, Austria, on November 6. The full text is available on the IMF’s website (
International Monetary Fund

domestic policies and a shortage of foreign exchange. They stressed the need for developing countries to tackle the problem of capital flight and insisted that their willingness to lend would be influenced strongly by action in this area, reflecting a concern that additional bank lending might finance further capital flight. This worry has heightened banks’ desire to link their lending to the pursuit by developing countries of appropriate fiscal, monetary, interest, and exchange rate policies to provide incentives for domestic savings to be invested at home

International Monetary Fund. Independent Evaluation Office

Asia had worked its way through the region. The Malaysian experience has received both positive and negative academic assessment, depending on whether one thinks that, in the fall of 1998, Malaysia still faced a significant risk of further capital flight ( Kaplan and Rodrik, 2001 ; Johnson and Mitton, 2003 ). If the capital controls indeed worked in Malaysia as intended, it may be due to the controls’ strictly temporary nature, the supporting policies (including measures to strengthen the banking and corporate sectors), Malaysia’s institutional capacity, and a