Effects of trade liberalization with heterogeneous firms under stagnation

Ken-ichi Hashimoto

ISER Discussion Paper from Institute of Social and Economic Research, The University of Osaka

Abstract: We investigate the effect of trade liberalization in a stagnant economy characterized by firm-level productivity heterogeneity. By incorporating Melitz’s (2003) framework into a model of economic stagnation driven by insufficient aggregate demand, we examine how trade opening affects employment and consumption. The outcomes deviate significantly from those of conventional models that assume full employment. Under conditions of demand deficiency, the selection effect induced by trade—whereby high-productivity firms expand and less efficient firms exit—leads to a reduction in total employment. This deterioration in labor market conditions suppresses aggregate income and consumption, suggesting that trade liberalization may inadvertently worsen economic stagnation.

Date: 2026-04
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Persistent link: https://EconPapers.repec.org/RePEc:dpr:wpaper:1310

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