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Destabilization Effect of International Trade in a Perfect Foresight Dynamic General Equilibrium Model

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Author Info

  • Kazuo Nishimura

    ()
    (Institute of Economic Research, Kyoto University)

  • Alain Venditti

    ()
    (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM, EHESS & EDHEC)

  • Makoto Yano

    ()
    (Institute of Economic Research, Kyoto University)

Abstract

In the present paper, we consider a two-country, two-good, two-factor general equilibrium model with CIES non-linear preferences, asymmetric technologies across countries and decreasing returns to scale. It is shown that aggregate instability and endogenous fluctuations may occur due to international trade. In particular, we prove that the integration into a common market on which countries trade the produced good and the capital input may lead to period-two cycles even when the closed-economy equilibrium is saddle-point stable in both countries.

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Bibliographic Info

Paper provided by Aix-Marseille School of Economics, Marseille, France in its series AMSE Working Papers with number 1313.

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Length: 40 pages
Date of creation: Mar 2013
Date of revision: Feb 2013
Handle: RePEc:aim:wpaimx:1313

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Web page: http://www.amse-aixmarseille.fr/en
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Keywords: Perfect foresight dynamic general equilibrium model; international trade; aggregate instability; endogenous fluctuations; non-linear preferences;

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