Domestic Macroeconomic Policies and Capital Flight from Nigeria: Evidence from a Macro-econometric Model

There is no scarcity of empirical studies into the causes of capital flight or the associated attempt to relate the phenomenon to economic growth and other macroeconomic stability indicators. Studies that undertook that include Onwuoduokit, (2002), Ajayi (1992, 2002) Pastor (1990), among others. The emerging list of causal variables is equally diverse ranging from balance of payments disequilibrium and real exchange rate distortions to political risks and other social imbalances. Expectedly too, different works place different premia and weights on different causal variables. Indeed, distilling from the menu of variables that influence capital flight will continue to be a major challenge to macroeconomic researchers. However, there is still intense debate on how effective or otherwise domestic fiscal and monetary policies can be in reducing capital flight, either through impacting on its causes or by directly influencing capital flows. This work aims to contribute to this debate for a typical developing country. It proposes a macroeconomic model with the intent first of empirically evaluating the place of risk in capital movements and, thereafter, to evaluate the effectiveness of domestic fiscal and monetary policies in combating capital flight. It found evidence in support of risk and volatility influencing the outflow of capital and of capital flight responding directly to capital controls, but could not find evidence to support indirect control of capital flight using fiscal and monetary policies to control uncertainty.