A Mathematical Model of Foreign Capital Inflow

TL;DR

This paper develops a stochastic dynamic programming model to analyze foreign capital inflow from developed to developing countries, examining how various parameters influence capital flow, interest rates, and exchange rates.

Contribution

It introduces a novel SDP framework for modeling foreign capital inflow and provides numerical solutions and analysis of parameter impacts.

Findings

Model solutions exist under regularity conditions.

Parameter changes significantly affect capital inflow paths.

Interest rates and exchange rates are sensitive to model parameters.

Abstract

The paper models foreign capital inflow from the developed to the developing countries in a stochastic dynamic programming (SDP) framework. Under some regularity conditions, the existence of the solutions to the SDP problem is proved and they are then obtained by numerical technique because of the non-linearity of the related functions. A number of comparative dynamic analyses explore the impact of parameters of the model on dynamic paths of capital inflow, interest rate in the international loan market and the exchange rate.