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Trade Openness and Investment Instability

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Author Info
Assaf Razin
Efraim Sadka
Tarek Coury

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Abstract

In the presence of lumpy investment cost of adjustment, globalization may have non-conventional effects on the level of investment and its cyclical behavior. Trade openness may lead to a discrete 'jump' in the level of investment, as it may trigger a discrete change in the terms of trade. Such a shift creates a sizeable boost in aggregate investment. But trade openness may also lead to boom-bust cycles of investment (namely, multiple equilibrium) supported by self-validating expectations. In this sense globalization destabilizes the economy. There can be substantial gains from globalization in the investment-boom equilibrium. However, gains could be small, or negative, in the investment-bust equilibrium.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8827.

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Date of creation: Mar 2002
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Handle: RePEc:nbr:nberwo:8827

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F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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