Working Paper: CEPR ID: DP2234
Authors: Seppo Honkapohja; Arja Turunenred
Abstract: We consider an endogenous growth model that includes international trade in capital goods. The model yields several distinct balanced growth solutions that can be classified using stability under adaptive learning. Some of the equilibria can involve growth rates much higher (or lower) than others. The impact of international trade on the equilibria include local (differential) effects and global bifurcation (global) changes. If a favourable bifurcation occurs, equilibria associated with low growth disappear. This phenomenon suggests a possible explanation for observations in which active international trade by some countries seems to have been associated with periods of exceptionally high growth. We show that equivalent bifurcation effects can be induced in autarky using domestic industry subsidies. However, such subsidization can be very costly.
Keywords: innovation; international trade; technology policy; multiple equilibria
JEL Codes: F12; F15; O41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade in capital goods (E22) | growth rates (O40) |
| favorable shift in trade policy (F13) | elimination of low growth equilibria (D50) |
| elimination of low growth equilibria (D50) | transition to higher growth rates (O41) |
| domestic subsidies (H23) | similar effects as trade (F19) |