An Empirical Analysis of the Financial Revolving Door Hypothesis: An Evidence from Pakistan

Abstract

A simultaneous equation technique was used to investigate the relationship between capital flight (CF) and external debt (the financial revolving door theory) in Pakistan. Time series data from 1984 to 2020 are used to determine the algorithm. Using an appropriate approach, the research contributes to the measurement of capital flight from Pakistan. Three Stages Least Square is used in this study to examine institutions' relationships with capital market literature. (3SLS method). The study found that poor governance, inflation, external debt, and interest rate differentials caused CF and capital outflow by creating an unstable and unfavourable environment for savings and investment. CF causes external borrowings and world capital market borrowing. Capital retention is crucial due to this and ecological development policies. The Granger Causality Test validates Pakistan's Financial Revolving Door Hypothesis. The study concludes with policy suggestions.