RWTH Aachen University∗

It is often argued that capital flows to developing countries could pre-vent a looming “asset price meltdown ” in aging industrialized econo-mies. In this paper, we scrutinize this argument using a two-country model that explicitly accounts for capital market imperfections in the form of expropriation risk. We relate a government’s decision to ex-propriate foreign investors to conflicting distributional interests within the host-country population and analyze the effect of varying the pop-ulation growth rate. While higher population growth would, indeed, spur foreign investments in a world of perfect capital markets, it re-duces the volume of capital inflows if the risk of expropriation is taken into account. However, this effect may vanish over time, and in the medium run, higher population growth may raise the feasible volume of foreign investment