ERI Discussion Paper Series No.91
A Model of International Capital Flows

November 1999
Hiroshi Shibuya
(Otaru University of Commerce;
Economic Planning Agency)


This paper presents a model of unstable international capital flows. Production exhibits increasing returns in the early stage of economic development. Increasing returns lead to strategic complementarities among the actions of international inverostors. The result is Pareto-ranked multiple Nash equilibria: a low and a high foreign investment equilibrium. Sudden switches between two equilibria represent economic takeoff and capital flight. The model identifies the basic factors that can trigger the sudden reversal of capital flows. The mechanism of capital inflow and outflow turns out to be asymmetric. The model also suggests numerous implications on economic development, exchange rate policy, uncovered interest rate parity, home bias, herd behavior, crisis contagion, capital control, goverment guarantee, coordination failure, and emerging markets.

Keywords : Increasing returns; Strategic complementarity; Multiple Nash equilibria; Economic development; Uncovered interest rate parity; Risk premium; Coordination failure; Emerging markets; Capital flight

Structure of the whole text(PDF-Format 1file)

  1. full text別ウィンドウで開きます。(PDF-Format 169 KB)
  2. Abstract
  3. page1
    I.    Introduction
  4. page4
    II.  The Model
  5. page13
    III. Comparative Statics
  6. page15
    IV. Mechanism of Economic Takeoff and Capital Flight
  7. page20
    V.  Policy Implications
  8. page25
    VI. Summary and Conclusions
  • 1-6-1 Nagata-cho, Chiyoda-ku, Tokyo 100-8914, Japan.
    Tel: +81-3-5253-2111