Working Paper: CEPR ID: DP1327
Authors: Gianmarco I.P. Ottaviano
Abstract: This paper investigates the possibility of endogenous fluctuations in the international distribution of economic activities in the presence of increasing returns, monopolistic competition, trade and convex adjustment costs without allowing for any local productive externalities. Using a two-country dynamic general equilibrium model, it derives necessary and sufficient conditions for the existence of self-reinforcing relocation processes. It shows that the occurrence of multiple equilibria and endogenous fluctuations is associated with a high degree of increasing returns to scale as well as low trade and adjustment costs. Under such circumstances relocation processes are driven by self-fulfilling expectations
Keywords: monopolistic competition; increasing returns; international trade; spatial fluctuations
JEL Codes: E32; F12; F22; R12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high increasing returns to scale, low trade costs, and low adjustment costs (F12) | emergence of multiple equilibria and self-reinforcing relocation processes (C62) |
| skilled workers' income increases with their number (J24) | agglomeration becomes a stable equilibrium (C62) |
| skilled workers' income decreases with their number (J31) | dispersion may prevail (D39) |
| interaction of centripetal forces and centrifugal forces (F32) | dynamic environment where expectations can drive economic outcomes (D84) |
| parameters such as trade costs, share of industrial good, and degree of substitutability between varieties (F12) | spatial fluctuations arise (R12) |