The paper models foreign capital inflow from the developed to the developing countries in a stochastic dynamic programming framework. The model is solved by numerical technique because of the non-linearity of the 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. The model also explores the possibility of financial crisis originating either in the developed country or in the developing country. The explanation of crisis in this structure is based on trade theoretic terms in a dynamic terms of trade framework rather than due to informational imperfections.
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