A detailed study of the economy of developing countries reveals to a large extent that movement of fund from these countries to the developed ones has led to reduction in foreign exchange reserves which has in turn lead to increased external borrowing to offset development expenditure. The desire to cob this devastating act has led to several definitions, analysis and estimations of the term capital flight by so many analysts using various approaches. In this paper a model that predicts the economy of a developing nation associated with capital flight via the extended kalman filter is introduced, this predictive model encompasses a portfolio choice approach, where the flow of capital is accumulated into stock using data obtained from IFS (1970-2001).
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