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The Core-Periphery Model with Forward-Looking Expectations

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  • Richard E. Baldwin

Abstract

The 'core-periphery model' is vitiated by its assumption of static expectations. That is, migration (inter-regional or intersectoral) is the key to agglomeration, but migrants base their decision on current wage differences alone--even though migration predictably alters wages and workers are (implicitly) infinitely lived. The assumption was necessary for analytic tractability. The model can have multiple stable equilibria, so allowing forward-looking expectations would have forced consideration of the very difficult perhaps even intractable issues of global stability in non-linear dynamic systems. This paper's main contribution is to present a set of solution techniques partly analytic and partly numerical that allow us to consider forward-looking expectations. These techniques reveal a startling result. If quadratic migration costs are sufficiently high, allowing forward-looking behaviour has no impact on the main results, so static expectations are truly an assumption of convenience. If migration costs are lower, however, forward-looking behaviour creates history-vs-expectations considerations. In this case self-fulfilling prophecy.

Suggested Citation

  • Richard E. Baldwin, 1999. "The Core-Periphery Model with Forward-Looking Expectations," NBER Working Papers 6921, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:6921
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    References listed on IDEAS

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    1. Kyoji Fukao & Roland Benabou, 1993. "History Versus Expectations: A Comment," The Quarterly Journal of Economics, Oxford University Press, vol. 108(2), pages 535-542.
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    5. Puga, Diego, 1999. "The rise and fall of regional inequalities," European Economic Review, Elsevier, vol. 43(2), pages 303-334, February.
    6. Fujita,Masahisa & Thisse,Jacques-François, 2013. "Economics of Agglomeration," Cambridge Books, Cambridge University Press, number 9781107001411, March.
    7. Robert J. Barro & Paul Romer, 1993. "Economic Growth," NBER Books, National Bureau of Economic Research, Inc, number barr93-1.
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    8. Paul Krugman, 1991. "History versus Expectations," The Quarterly Journal of Economics, Oxford University Press, vol. 106(2), pages 651-667.
    9. Krugman, Paul, 1991. "Increasing Returns and Economic Geography," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 483-499, June.
    10. repec:hhs:iuiwop:430 is not listed on IDEAS
    11. Venables, Anthony J, 1987. "Trade and Trade Policy with Differentiated Products: A Chamberlinian-Ricardian Model," Economic Journal, Royal Economic Society, vol. 97(387), pages 700-717, September.
    12. Krugman, Paul & Venables, Anthony J, 1990. "Integration and the Competitiveness of Peripheral Industry," CEPR Discussion Papers 363, C.E.P.R. Discussion Papers.
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    Cited by:

    1. Forslid, Rikard & Midelfart, Karen Helene, 2005. "Internationalisation, industrial policy and clusters," Journal of International Economics, Elsevier, vol. 66(1), pages 197-213, May.
    2. Lapo Valentina, 2003. "Spatial distribution of investment in Russia: the effect of agglomeration," EERC Working Paper Series 01-087e, EERC Research Network, Russia and CIS.
    3. Marco Maffezzoli & Federico Trionfetti, "undated". "Approximation Methods: an Application to the Core-Periphery Model," Working Papers 219, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    4. Rikard Forslid & Ian Wooton, 2003. "Comparative Advantage and the Location of Production," Review of International Economics, Wiley Blackwell, vol. 11(4), pages 588-603, September.
    5. Giovanni Peri & Luisa Lambertini, "undated". "Can Taxes Drive Agglomeration while approaching the Global Economy?," Working Papers 157, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.

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    JEL classification:

    • F1 - International Economics - - Trade
    • F2 - International Economics - - International Factor Movements and International Business

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