Optimal Behavior of International Investors, Economic Development, and Currency Crises

2005 Fiscal Year Final Research Report Summary

• Project/Area Number: 15530207
• Research Category: Grant-in-Aid for Scientific Research (C)
• Allocation Type: Single-year Grants
• Section: 一般
• Research Field: Public finance/Monetary economics
• Research Institution: Otaru University of Commerce
• Principal Investigator: SHIBUYA Hiroshi Otaru University of Commerce, Faculty of Commerce, Professor, 商学部, 教授 (00250530)
• Project Period (FY): 2003 – 2005
• Keywords: International Capital / Economic Development / Increasing Returns / Multiple Equilibria / Optimal Portfolio / Interest Rate Parity

Research Abstract

The study presents a model of economic development and international capital flows. In the early stage of development, investments are complementary and production exhibits increasing returns. This creates strategic complementarities among investors, which make both low and high capital equilibria possible. Movements between two equilibria represent economic takeoff and capital flight. The model shows how expectations and risks determine the final equilibrium of the economy by changing the structure of multiple equilibria. Given the multiple equilibria, the role of government is to achieve the high equilibrium through policies that affect equilibrium switching factors in the right directions. As the economy take off successfully, it enters the stage of decreasing returns where multiple equilibria no longer exist. Thus the role of government must change.