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Trade Openness, Investment Instability and Terms-of-Trade Volatility

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Author Info
Assaf Razin
Efraim Sadka
Tarek Coury

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Abstract

In the presence of economies of scale in the investment technology, trade openness may have non-conventional effects on the level of investment, its cyclical behavior, and the volatility of the terms of trade. Trade openness may lead to boom-bust cycles of investment supported by self-fulfilling expectations. The economy may oscillate between 'optimistic' expectations, 'good' terms-of-trade and investment boom to 'pessimistic' expectations, 'bad' terms-of-trade and investment bust. We also suggest that the likelihood of such oscillations is higher for developing than for developed economies, because the former may typically incur higher setup costs of investment. This phenomenon may help to explain the excessive volatility of the terms of trade of developing countries, relative to industrial countries.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9332.

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Date of creation: Nov 2002
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Handle: RePEc:nbr:nberwo:9332

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F1 - International Economics - - Trade
F3 - International Economics - - International Finance

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  2. Smith, Alasdair & Venables, Anthony J., 1988. "Completing the Internal Market in the European Community: Some Industry Simulations," CEPR Discussion Papers 233, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  3. Mendoza, Enrique G, 1995. "The Terms of Trade, the Real Exchange Rate, and Economic Fluctuations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(1), pages 101-37, February. [Downloadable!] (restricted)
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  5. Rothschild, Michael, 1971. "On the Cost of Adjustment," The Quarterly Journal of Economics, MIT Press, vol. 85(4), pages 605-22, November. [Downloadable!] (restricted)
  6. Meng, Q. & Velasco, A., 1999. "Can Capital Mobility be Destabilizing?," Working Papers 99-16, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
  7. Miller, Merton, 1998. "Asian financial crisis," Japan and the World Economy, Elsevier, vol. 10(3), pages 355-358, July. [Downloadable!] (restricted)
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  9. Qinglai Meng & Andres Velasco, 1999. "Can Capital Mobility be Destabilizing?," NBER Working Papers 7263, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Ricardo J. Caballero, 1997. "Aggregate Investment," NBER Working Papers 6264, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Irwin, Douglas A & Klenow, Peter J, 1994. "Learning-by-Doing Spillovers in the Semiconductor Industry," Journal of Political Economy, University of Chicago Press, vol. 102(6), pages 1200-1227, December. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Assaf Razin & Yona Rubinstein & Efraim Sadka, 2004. "Fixed Costs and FDI: The Conflicting Effects of Productivity Shocks," NBER Working Papers 10864, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Yochanan Shachmurove, 2004. "Economic Development in the Middle East," PIER Working Paper Archive 04-022, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania. [Downloadable!]
  3. Yamin Ahmad & Pietro Cova & Rodrigo Harrison, 2004. "Foreign Direct Investment versus Portfolio Investment : A Global Games Approach," Working Papers 05-03, UW-Whitewater, Department of Economics. [Downloadable!]
  4. Chantal Dupasquier & Patrick N. Osakwe, 2006. "Trade Regimes, Liberalization and Macroeconomic Instability in Africa," SCAPE Policy Research Working Paper Series 0604, National University of Singapore, Department of Economics, SCAPE. [Downloadable!]
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