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Monopolistic Competition, Trade and Endogenous Spatial Fluctuations

This paper investigates the possibility of endogenous fluctuations in the international distribution of economic activities in the presence of increasing returns, monopolistic competition, trade and convex adjustment costs. Differently from the existing literature, it does not allow for any local productive externalities. Using a 2-country dynamic general equilibrium model, it derives necessary and sufficient conditions for the existence of self-reinforcing relocation processes. It shows that the occurrence of multiple equilibria and endogenous fluctuations is associated with a high degree of increasing returns to scale as well as low trade and adjustment costs. Under such circumstances relocation processes are driven by self-fulfilling expectations.

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Paper provided by Dipartimento Scienze Economiche, Universita' di Bologna in its series Working Papers with number 240.

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Date of creation: Jan 1996
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Handle: RePEc:bol:bodewp:240
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  1. Paul Krugman, 1992. "A Dynamic Spatial Model," NBER Working Papers 4219, National Bureau of Economic Research, Inc.
  2. Paul Krugman & Anthony J. Venables, 1995. "Globalization and the Inequality of Nations," NBER Working Papers 5098, National Bureau of Economic Research, Inc.
  3. Paul Krugman, 1991. "History versus Expectations," The Quarterly Journal of Economics, Oxford University Press, vol. 106(2), pages 651-667.
  4. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  5. Paul Krugman, 1990. "Increasing Returns and Economic Geography," NBER Working Papers 3275, National Bureau of Economic Research, Inc.
  6. Kiminiori Matsuyama, 1994. "Complementaries and Cumulative Processes In Models of Monopolistic Competition," Discussion Papers 1106, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  7. repec:hhs:iuiwop:430 is not listed on IDEAS
  8. Grandmont, Jean-Michel, 1985. "On Endogenous Competitive Business Cycles," Econometrica, Econometric Society, vol. 53(5), pages 995-1045, September.
  9. Kyoji Fukao & Roland Benabou, 1993. "History Versus Expectations: A Comment," The Quarterly Journal of Economics, Oxford University Press, vol. 108(2), pages 535-542.
  10. Forslid, Rikard, 1999. "Agglomeration with Human and Physical Capital: an Analytically Solvable Case," CEPR Discussion Papers 2102, C.E.P.R. Discussion Papers.
  11. Mussa, Michael, 1978. "Dynamic Adjustment in the Heckscher-Ohlin-Samuelson Model," Journal of Political Economy, University of Chicago Press, vol. 86(5), pages 775-91, October.
  12. Baldwin, Richard E., 2001. "Core-periphery model with forward-looking expectations," Regional Science and Urban Economics, Elsevier, vol. 31(1), pages 21-49, February.
  13. Ottaviano, Gianmarco I. P., 1999. "Integration, geography and the burden of history," Regional Science and Urban Economics, Elsevier, vol. 29(2), pages 245-256, March.
  14. Tibor Scitovsky, 1954. "Two Concepts of External Economies," Journal of Political Economy, University of Chicago Press, vol. 62, pages 143.
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