Is Openness Good for Stagnation?
Using a symmetric multi-country model that allows for the possibility of stagnation, this paper analyzes the effects of openness on effective demand. A regime shift from autarky to free trade boosts the value of consumption utility by expanding the range of consumption goods available to people in every country. However, under stagnation, the rise in value of consumption utility lowers the time preference rate through a decline in the inflation rate, while not affecting the liquidity premium that represents the desire to hold money. Therefore, openness causes realized consumption to decrease and saving to increase. Consequently, effective demand decreases.
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