Coupled dynamics with an external system and application to international finance.

Abstract The paper develops a generalized model of coupled dynamics for addressing the choice theoretic problems of economics and other behavioural sciences. The model extends the framework of coupled system to include an external sector that generates a richer dynamics. The model is applied to explain foreign capital inflow from the developed to the developing countries. Under certain regularity conditions, the existence of the solutions to the dynamic choice problem is proved and they are then obtained by numerical technique because of the non-linearity of the related functions. Robustness results are achieved via additional simulations by perturbation of the baseline parameter values. Highlights • External system plays important role for the coupled dynamical system. • This phenomenon is often observed in natural and behavioural sciences. • In the capital inflow problem, balance of trade is such external system. • Simulations with the present model replicate real life data. • Large rise in lenders' fund show negative trend in capital inflow. [ABSTRACT FROM AUTHOR]