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Foreign trade and equilibrium indeterminacy

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  • Luis Aguiar-Conraria
  • Yi Wen

Abstract

We show that dependence of production on foreign inputs (or non-producible natural resources) can significantly increase the likelihood of indeterminacy. Payment of imported foreign factors of production may act as a semi-fixed cost, amplifying production externalities and returns to scale, making self-fulfilling expectations driven busyness cycles easier to arise. This is demonstrated using a standard neoclassical growth model. Calibration exercise shows that the required increasing returns to scale can be reduced by as much as 64% based on estimated share of foreign inputs in production for OECD countries.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2005-041.

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Date of creation: 2005
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Handle: RePEc:fip:fedlwp:2005-041

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Keywords: International trade ; Prices;

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  1. Wen, Yi, 2000. "Understanding Self-Fulfilling Rational Expectations Equilibria in Real Business Cycle Models," Working Papers 00-02, Cornell University, Center for Analytic Economics.
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Citations

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Cited by:
  1. Mino, Kazuo, 2008. "Financial integration and volatility in a two-country world," MPRA Paper 16953, University Library of Munich, Germany.
  2. Luís Aguiar-Conraria & Yi Wen, 2007. "Understanding the Large Negative Impact of Oil Shocks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(4), pages 925-944, 06.
  3. Luís Francisco Aguiar-Conraria & Yi Wen, 2005. "Understanding the Impact of Oil Shocks," NIPE Working Papers 2/2005, NIPE - Universidade do Minho.
  4. Aguiar-Conraria, Luís & Wen, Yi, 2008. "A Note On Oil Dependence And Economic Instability," Macroeconomic Dynamics, Cambridge University Press, vol. 12(05), pages 717-723, November.
  5. Zhang, Yan & Chen, Yan, 2009. "Tariff and Equilibrium Indeterminacy - A Global Analysis," MPRA Paper 18296, University Library of Munich, Germany.
  6. Yunfang Hu & Kazuo Mino, 2009. "Financial Integration and Aggregate Stability," Discussion Papers in Economics and Business 09-01, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  7. Zhang, Yan & Chen, Yan, 2008. "Tariff and Equilibrium Indeterminacy--A Note," MPRA Paper 10044, University Library of Munich, Germany.
  8. Kazuo Mino, 2008. "Preference Structure and Volatility in a Financially Integrated World," Discussion Papers in Economics and Business 08-05, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).

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