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Trade Openness and Investment Instability

Author

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

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

  • Razin, Assaf & Sadka, Efraim & Coury, Tarek, 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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    2. Sokolova, Maria V., 2016. "Exchange Rates, International Trade and Growth: Re-Evaluation of Undervaluation," Conference papers 332790, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    3. 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.
    4. 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.
    5. Emma Aisbett, 2007. "Why are the Critics So Convinced that Globalization is Bad for the Poor?," NBER Chapters, in: Globalization and Poverty, pages 33-86, National Bureau of Economic Research, Inc.
    6. 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.

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    JEL classification:

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

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