Capital Flight (1 Viewer)

[bfox]

Wondering what the impacts of capital flight would be?

 

[munchiecrunchie]

increase in supply of currency for that country - a rapid depreciation in the currency, creating imported inflation

external instability

force some firms out of business (not enough funds; were reliant on foreign funds)

therefore less jobs, unemployment increases

thats all i can think of.

try reading up on the asian financial crisis - thats basically what happened (capital flight leading to a depreciation in currency which crashed their economy)

 

[bfox]

Ok thanks. So would this result in stagflation, or would the slowing economy and rising unemployment bring down the inflation rate???

 

[munchiecrunchie]

hmm.

if imports was a major source of goods for that country, it could feed into business costs and produce cost push inflation, and this supply shock could possibly trigger stagflation (businesses cut costs by sacking people, unemployment also increases).

however, if imports did not play a major role in the economy, then maybe this would just result in a sharp downturn in the economy.

i'm not entirely sure, thats just what i think.