Trade Openness and Investment Instability

Assaf Razin, Efraim Sadka and Tarek Coury ()

No 3259, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Lumpy adjustment cost; Multiple equilibrium; Boom-bust investment cycles (search for similar items in EconPapers)
JEL-codes: F10 H10 (search for similar items in EconPapers)
Date: 2002-03
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Citations: View citations in EconPapers (7)

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