Trade Openness, Investment Instability and Terms-of-Trade Volatility

Assaf Razin, Efraim Sadka and Tarek Coury ()

No 9332, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In the presence of economies of scale in the investment technology, trade openness may have non-conventional effects on the level of investment, its cyclical behavior, and the volatility of the terms of trade. Trade openness may lead to boom-bust cycles of investment supported by self-fulfilling expectations. The economy may oscillate between 'optimistic' expectations, 'good' terms-of-trade and investment boom to 'pessimistic' expectations, 'bad' terms-of-trade and investment bust. We also suggest that the likelihood of such oscillations is higher for developing than for developed economies, because the former may typically incur higher setup costs of investment. This phenomenon may help to explain the excessive volatility of the terms of trade of developing countries, relative to industrial countries.

JEL-codes: F1 F3 (search for similar items in EconPapers)
Date: 2002-11
New Economics Papers: this item is included in nep-fin
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Citations: View citations in EconPapers (13)

Published as Razin, Assaf & Sadka, Efraim & Coury, Tarek, 2003. "Trade openness, investment instability and terms-of-trade volatility," Journal of International Economics, Elsevier, vol. 61(2), pages 285-306, December.

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