Macroeconomic volatility and welfare loss under free-trade in two-country models
This paper investigates the interlinkage in the business cycles based on sunspot fluctuations of large-country economies in a free-trade equilibrium. We consider a two-country, two-good, two-factor general equilibrium model with Cobb-Douglastechnologies, sector-specific externalities and linear preferences. We also assume constant social returns in the investment good sector but decreasing social returns in the consumption good sector. We first identify the determinants of each country's accumulation pattern in autarky equilibrium, and second we show that some country's sunspot fluctuations may spread throughout the world once trade opens even if the other country has determinacy under autarky. We thus prove that under free-trade, globalization and market integration may have destabilizing effects on a country's competitive equilibrium. Finally, we characterize a configuration in which opening to international trade improves the stationary welfare at the world level but deteriorates the stationary welfare of the country which imports investment goods and exports consumption goods. We thus show that in opposition to the standard belief, international trade may not be beneficial to all trading partners in the long run. Moreover, we prove that for some country, international trade may have contrasted consequences as it may at the same time improve the stationary welfare and have a destabilizing effect.
|Date of creation:||22 May 2008|
|Note:||View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00281377|
|Contact details of provider:|| Web page: https://hal.archives-ouvertes.fr/|
When requesting a correction, please mention this item's handle: RePEc:hal:wpaper:halshs-00281377. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CCSD)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.