Trade Openness and Investment Instability

Assaf Razin, Efraim Sadka and Tarek Coury ()

No 8827, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In the presence of lumpy investment cost of adjustment, globalization may have non-conventional effects on the level of investment and its cyclical behavior. Trade openness may lead to a discrete 'jump' in the level of investment, as it may trigger a discrete change in the terms of trade. Such a shift creates a sizeable boost in aggregate investment. But trade openness may also lead to boom-bust cycles of investment (namely, multiple equilibrium) supported by self-validating expectations. In this sense globalization destabilizes the economy. There can be substantial gains from globalization in the investment-boom equilibrium. However, gains could be small, or negative, in the investment-bust equilibrium.

JEL-codes: E3 F4 (search for similar items in EconPapers)
Date: 2002-03
New Economics Papers: this item is included in nep-lam
Note: ITI
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Citations: View citations in EconPapers (6)

Published as Razin, Assaf, Efraim Sadka and Tarek Coury. “Trade openness, investment instability, and terms-oftrade volatility.” Journal of International Economics 59, 2 (2003).

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