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Trade Openness and Investment Instability

Author

Listed:
  • Coury, Tarek
  • Razin, Assaf
  • Sadka, Efraim

Abstract

In the presence of lumpy adjustment costs of investment, globalization may have non-conventional effects on the level of investment and its cyclical behaviour. Free trade may lead to a discrete ‘jump’ in the level of investment, as it triggers discrete terms-of-trade changes which either appreciate or depreciate the setup cost of investment. As a result, the economy may alternate between ‘optimistic’ and ‘pessimistic’ expectations and self-validating boom and bust investment cycles. There could be substantial gains from globalization in the investment-boom equilibrium and meager, or negative, gains in the investment-bust equilibrium.

Suggested Citation

  • Coury, Tarek & Razin, Assaf & Sadka, Efraim, 2002. "Trade Openness and Investment Instability," CEPR Discussion Papers 3259, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:3259
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    References listed on IDEAS

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    Cited by:

    1. Hira Mujahid & Shaista Alam, 2014. "The Impact of Trade Liberalization on Demand and Price Volatility in Pakistan: Co Integration Approach for Compensation Hypothesis," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 4(6), pages 744-754, June.

    More about this item

    Keywords

    boom-bust investment cycles; lumpy adjustment cost; multiple equilibrium;

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • H10 - Public Economics - - Structure and Scope of Government - - - General

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