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

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  • Assaf Razin
  • Efraim Sadka
  • Tarek Coury

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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Publication status: published as Razin, Assaf & Sadka, Efraim & Coury, Tarek, 2003. "Trade openness, investment instability and terms-of-trade volatility," Journal of International Economics, Elsevier, vol. 61(2), pages 285-306, December.
Handle: RePEc:nbr:nberwo:9332

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Citations

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Cited by:
  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.
  2. Malik, Adeel & Temple, Jonathan, 2006. "The Geography of Output Volatility," CEPR Discussion Papers 5516, C.E.P.R. Discussion Papers.
  3. Maria Garcia-Vega & Alessandra Guariglia, . "Volatility, Financial Constraints and Trade," Discussion Papers 08/04, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
  4. Shafaeddin, Mehdi, 2006. "Does trade openness helps or hinders industrialization?," MPRA Paper 4371, University Library of Munich, Germany.
  5. Emma Aisbett, 2005. "Why are the Critics so Convinced that Globalization is Bad for the Poor?," NBER Working Papers 11066, National Bureau of Economic Research, Inc.
  6. Montalbano, Pierluigi, 2011. "Trade Openness and Developing Countries' Vulnerability: Concepts, Misconceptions, and Directions for Research," World Development, Elsevier, vol. 39(9), pages 1489-1502, September.
  7. 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.
  8. Dearmon, Jacob & Grier, Robin, 2011. "Trust and the accumulation of physical and human capital," European Journal of Political Economy, Elsevier, vol. 27(3), pages 507-519, September.
  9. 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.
  10. Vedia Jerez, Daniel Hernan, 2007. "De riesgo y pánico: una analítica de volatilidad y crecimiento 1960-2006
    [About risk and panic, an overview of volatility and growth 1960-2006]
    ," MPRA Paper 21577, University Library of Munich, Germany.
  11. 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.
  12. Emiliano Magrini & Pierluigi Montalbano, 2012. "Trade openness and vulnerability to poverty: Vietnam in the long-run (1992-2008)," Working Paper Series 3512, Department of Economics, University of Sussex.
  13. Cavalcanti, Marco Antonio F.H., 2010. "Credit market imperfections and the power of the financial accelerator: A theoretical and empirical investigation," Journal of Macroeconomics, Elsevier, vol. 32(1), pages 118-144, March.

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