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Foreign Trade and Equilibrium Indeterminacy

  • Aguiar-Conraria, Luis

    (Cornell U and NIPE, U of Minho)

  • Wen, Yi

    (Cornell U)

We show that dependence of production on foreign inputs (or non-producible natural resources) can significantly increase the likelihood of indeterminacy. Payment of imported foreign factors of production may act as a semi-fixed cost, amplifying production externalities and returns to scale, making self-fulfilling expectations driven busyness cycles easier to arise. This is demonstrated using a standard neoclassical growth model. Calibration exercise shows that the required increasing returns to scale can be reduced by as much as 64% based on estimated share of foreign inputs in production for OECD countries.

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Paper provided by Cornell University, Center for Analytic Economics in its series Working Papers with number 04-09.

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Date of creation: May 2004
Date of revision:
Handle: RePEc:ecl:corcae:04-09
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