Fickle investors: An impediment to growth?

The aim of this paper is to construct theoretical models which help to shed light on the recent criticisms of volatile investment flows. We do not mak e any empirical attempt to establish the existence or gauge the importance of the adverse effects of volatile investment flows nor do we make any impl icit claims regarding the role of such flows in recent exchange rate crises . Instead we simply assume the existence of fickle outside investors and ex amine the consequences for the economy in the context of two partial equili brium endogenous growth models. In our first model, the scale of fickle outside investment funds traces out a mean-variance trade-off for the growth rate of the economy. In particula r, the volatility of these funds dissuades risk averse agents from risky en trepreneural activities. This result opens up the possibility that some reg ulation of outside investment may increase growth. Our second model involve s increasing returns and multiple equilibria. In the context of this model fickle investor behavior can have very persistent and substantial effects o n both output growth and volatility. (C) 1999 Elsevier Science B.V. All rig hts reserved.