Sven Steinkamp

While illicit capital flight is a major concern of policy makers in developing countries, there is only little research on the possible link between capital flight and development aid. In this paper, we address the issue for Nepal, a stereotypical financially-closed developing economy that is highly dependent on resources from abroad. Distinguishing features of our approach are the use of a narrowly defined proxy of capital flight, based on trade-cost adjusted mirror trade statistics, and the focus on the foreign-exchange cash component of development aid. We document a robust partial correlation between aid and outward capital flight that is economically and statistically significant. Based on three comparisons, we consider this correlation to be indicative of a causal link. First, we compare aid to remittances, an alternative form of foreign-exchange inflows where the capital flight motivation is absent. Second, we compare the FX-cash component to broader aid definitions that include in-kind transfers. Finally, we compare the subcomponents of export underinvoicing and import overinvoicing and show that only the latter is driving our results.

Joint work with Frank Westermann

The former EU president Jean-Claude Junker has proposed that all countries of the European Union should also adopt the euro as their currency and recent research has shown that countries currently pursuing this goal indeed fulfill the classical Optimal Currency Area (OCA) criterion of positively correlated shocks with the European Monetary Union (EMU). We illustrate, however, that not only the correlation of shocks but also a common impulse response pattern over time is needed for a currency area to be optimal. We test this additional OCA criterion using the concept of a common serial correlation test. The test clearly rejects the notion that the potentially acceding countries share a common cyclical response pattern with the EMU aggregate – except for Sweden. Instead, the business cycles in most of the other countries exhibit only a very weak form of codependence.

Joint work with Louisa Grimm and Frank Westermann