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Exchange Rate Misalignment and Capital Flight from Botswana: A Cointegration Approach with Risk Thresholds

Newcastle Business School, The University of Newcastle, Callaghan, NSW 2308, Australia
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J. Risk Financial Manag. 2019, 12(2), 101; https://doi.org/10.3390/jrfm12020101
Received: 30 May 2019 / Revised: 11 June 2019 / Accepted: 15 June 2019 / Published: 17 June 2019
(This article belongs to the Collection Trends in Emerging Markets Finance, Institutions and Money)
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Abstract

This study investigates the impact of exchange rate misalignment on outward capital flight in Botswana over the period 1980–2015. The study uses the autoregressive distributed lag (ARDL) approach to cointegration and the Toda and Yamamoto (1995) approach to Granger causality. Botswana’s currency misalignment was caused by current account imbalances. The most important determinant of capital flight from Botswana is trade openness, which indicates that exportable commodities are misinvoiced leading to net capital outflows. Our main findings show that in the long-run, when the currency is overvalued, the volume of capital flight through trade misinvoicing declines and increasing foreign reserves does not reduce outward capital flight. However, when the currency is undervalued, the volume of capital flight through trade misinvoicing increases and foreign reserves reduce outward capital flight. Investors respond more to prospects of devaluation than to inflation. Botswana should tolerate overvaluation of the pula of only up to 5%. When the pula is overvalued beyond 5%, capital flight increases substantially. The government has to formulate trade regulations and monitor imported and exported commodities. Botswana should also implement capital controls to limit capital smuggling and maintain monetary autonomy. View Full-Text
Keywords: real exchange rate; exchange rate misalignment; overvaluation; undervaluation; capital flight real exchange rate; exchange rate misalignment; overvaluation; undervaluation; capital flight
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This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited (CC BY 4.0).

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Bosupeng, M.; Dzator, J.; Nadolny, A. Exchange Rate Misalignment and Capital Flight from Botswana: A Cointegration Approach with Risk Thresholds. J. Risk Financial Manag. 2019, 12, 101.

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