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Foreign trade and equilibrium indeterminacy

  • Luis Aguiar-Conraria
  • Yi Wen

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 Federal Reserve Bank of St. Louis in its series Working Papers with number 2005-041.

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Date of creation: 2005
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Handle: RePEc:fip:fedlwp:2005-041
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