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Expectation‐driven fluctuations and welfare loss under free trade in two‐country models

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  • Kazuo Nishimura
  • Alain Venditti
  • Makoto Yano

Abstract

This paper investigates the interlinkage in the business cycles based on expectation‐driven fluctuations of large‐country economies in a free‐trade equilibrium. We consider a two‐country, two‐good, two‐factor general equilibrium model with sector‐specific externalities. We show that some country's expectation‐driven fluctuations can spread throughout the world once trade opens even if the other country has determinacy under autarky. We thus prove that under free trade, globalization and market integration can have destabilizing effects on a country's competitive equilibrium. Finally, we characterize a configuration in which opening to international trade improves the stationary welfare at the world level but deteriorates the stationary welfare of the country that imports investment goods and exports consumption goods. We conclude that in opposition to the standard belief, international trade might not be beneficial to all trading partners in the long run.

Suggested Citation

  • Kazuo Nishimura & Alain Venditti & Makoto Yano, 2010. "Expectation‐driven fluctuations and welfare loss under free trade in two‐country models," International Journal of Economic Theory, The International Society for Economic Theory, vol. 6(1), pages 97-125, March.
    • Handle: RePEc:bla:ijethy:v:6:y:2010:i:1:p:97-125
    DOI: 10.1111/j.1742-7363.2009.00124.x
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    References listed on IDEAS

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    3. Kazuo Nishimura & Jess Benhabib & Alain Venditti, 2002. "Indeterminacy and cycles in two-sector discrete-time model," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 20(2), pages 217-235.
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    Cited by:

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    3. Eric W. Bond & Kazumichi Iwasa & Kazuo Nishimura, 2012. "The dynamic Heckscher–Ohlin model: A diagrammatic analysis," International Journal of Economic Theory, The International Society for Economic Theory, vol. 8(2), pages 197-211, June.
    4. Kazuo Nishimura & Myrna Wooders & Makoto Yano, 2013. "Macroeconomic dynamics and its micro foundation: A special issue in honor of Cuong Le Van," International Journal of Economic Theory, The International Society for Economic Theory, vol. 9(1), pages 1-3, March.
    5. Nastasia Henry & Alain Venditti, 2023. "On the (de)stabilization role of protectionism: Theory and evidence," Working Papers hal-04311555, HAL.
    6. Antoine Le Riche, 2017. "Macroeconomic volatility and trade in OLG economies," International Journal of Economic Theory, The International Society for Economic Theory, vol. 13(4), pages 401-425, December.
    7. Le Riche, Antoine & Lloyd-Braga, Teresa & Modesto, Leonor, 2022. "Intra-industry trade, involuntary unemployment and macroeconomic stability," Journal of Mathematical Economics, Elsevier, vol. 99(C).

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