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Trade Openness and Investment Instability

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

Abstract

In the presence of lumpy adjustment costs of investment, globalization may have non-conventional effects on the level of investment and its cyclical behaviour. Free trade may lead to a discrete ‘jump’ in the level of investment, as it triggers discrete terms-of-trade changes which either appreciate or depreciate the setup cost of investment. As a result, the economy may alternate between ‘optimistic’ and ‘pessimistic’ expectations and self-validating boom and bust investment cycles. There could be substantial gains from globalization in the investment-boom equilibrium and meager, or negative, gains in the investment-bust equilibrium.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3259.

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Date of creation: Mar 2002
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Handle: RePEc:cpr:ceprdp:3259

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Keywords: boom-bust investment cycles; lumpy adjustment cost; multiple equilibrium;

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