The Core-Periphery Model With Forward-Looking Expectations
AbstractThe 'core-periphery model' is vitiated by its assumption of static expectations. That is, migration (inter-regional or intersectoral) is the key to agglomeration, but migrants base their decision on current wage differences alone--even though migration predictably alters wages and workers are (implicitly) infinitely lived. The assumption was necessary for tractability. The model has multiple stable equilibria, so forward-looking behaviour requires characterisation of global stability in a non-linear dynamic system (a potentially intractable problem). This paper's main contribution is to present a set of solution techniques-partly analytic and partly numerical-that allows consideration of forward-looking expectations. Surprisingly, we find that if migration costs are sufficiently high, allowing forward-looking behaviour changes nothing, so static expectations are truly an assumption of convenience. If migration costs are lower, history-vs-expectations considerations emerge. Agglomeration, therefore, can be a self-fulfilling prophecy.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2085.
Date of creation: Feb 1999
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- Richard E. Baldwin, 1999. "The Core-Periphery Model with Forward-Looking Expectations," NBER Working Papers 6921, National Bureau of Economic Research, Inc.
- F1 - International Economics - - Trade
- F2 - International Economics - - International Factor Movements and International Business
- R1 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics
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