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Trade openness, investment instability and terms-of-trade volatility

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  • Razin, Assaf
  • Sadka, Efraim
  • Coury, Tarek

Abstract

In the presence of economies of scale in the investment technology, trade openness may have non-conventional effects on the level of investment, its cyclical behavior, and the volatility of the terms of trade. Trade openness may lead to boom-bust cycles of investment supported by self-fulfilling expectations. The economy may oscillate between 'optimistic' expectations, 'good' terms-of-trade and investment boom to 'pessimistic' expectations, 'bad' terms-of-trade and investment bust. We also suggest that the likelihood of such oscillations is higher for developing than for developed economies, because the former may typically incur higher setup costs of investment. This phenomenon may help to explain the excessive volatility of the terms of trade of developing countries, relative to industrial countries.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 61 (2003)
Issue (Month): 2 (December)
Pages: 285-306

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Handle: RePEc:eee:inecon:v:61:y:2003:i:2:p:285-306

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Web page: http://www.elsevier.com/locate/inca/505552

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Cited by:
  1. Emma Aisbett, 2007. "Why are the Critics So Convinced that Globalization is Bad for the Poor?," NBER Chapters, in: Globalization and Poverty, pages 33-86 National Bureau of Economic Research, Inc.
  2. Yamin Ahmad & Pietro Cova & Rodrigo Harrison, 2004. "Foreign Direct Investment versus Portfolio Investment : A Global Games Approach," Working Papers 05-03, UW-Whitewater, Department of Economics.
  3. Malik, Adeel & Temple, Jonathan R.W., 2009. "The geography of output volatility," Journal of Development Economics, Elsevier, vol. 90(2), pages 163-178, November.
  4. García-Vega, María & Guariglia, Alessandra & Spaliara, Marina-Eliza, 2012. "Volatility, financial constraints, and trade," International Review of Economics & Finance, Elsevier, vol. 21(1), pages 57-76.
  5. Yochanan Shachmurove, 2004. "Economic Development in the Middle East," PIER Working Paper Archive 04-022, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  6. Razin, Assaf & Rubinstein, Yona & Sadka, Efraim, 2004. "Fixed Costs and FDI: The Conflicting Effects of Productivity Shocks," CEPR Discussion Papers 4732, C.E.P.R. Discussion Papers.
  7. Emiliano Magrini & Pierluigi Montalbano, 2012. "Trade openness and vulnerability to poverty: Vietnam in the long-run (1992-2008)," Working Paper Series 3512, Department of Economics, University of Sussex.
  8. Vedia Jerez, Daniel Hernan, 2007. "De riesgo y pánico: una analítica de volatilidad y crecimiento 1960-2006
    [About risk and panic, an overview of volatility and growth 1960-2006]
    ," MPRA Paper 21577, University Library of Munich, Germany.
  9. Cavalcanti, Marco Antonio F.H., 2010. "Credit market imperfections and the power of the financial accelerator: A theoretical and empirical investigation," Journal of Macroeconomics, Elsevier, vol. 32(1), pages 118-144, March.
  10. Shafaeddin, Mehdi, 2006. "Does trade openness helps or hinders industrialization?," MPRA Paper 4371, University Library of Munich, Germany.
  11. Montalbano, Pierluigi, 2011. "Trade Openness and Developing Countries' Vulnerability: Concepts, Misconceptions, and Directions for Research," World Development, Elsevier, vol. 39(9), pages 1489-1502, September.
  12. Dearmon, Jacob & Grier, Robin, 2011. "Trust and the accumulation of physical and human capital," European Journal of Political Economy, Elsevier, vol. 27(3), pages 507-519, September.
  13. Chantal Dupasquier & Patrick N. Osakwe, 2006. "Trade Regimes, Liberalization and Macroeconomic Instability in Africa," SCAPE Policy Research Working Paper Series 0604, National University of Singapore, Department of Economics, SCAPE.

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