Working Paper: CEPR ID: DP3259
Authors: Assaf Razin; Efraim Sadka; Tarek Coury
Abstract: In the presence of lumpy adjustment costs of investment, globalization may have non-conventional effects on the level of investment and its cyclical behaviour. Free trade may lead to a discrete ?jump? in the level of investment, as it triggers discrete terms-of-trade changes which either appreciate or depreciate the setup cost of investment. As a result, the economy may alternate between ?optimistic? and ?pessimistic? expectations and self-validating boom and bust investment cycles. There could be substantial gains from globalization in the investment-boom equilibrium and meager, or negative, gains in the investment-bust equilibrium.
Keywords: boom-bust investment cycles; lumpy adjustment cost; multiple equilibrium
JEL Codes: F10; H10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade openness (F43) | terms of trade (F14) |
| terms of trade (F14) | setup costs of investment (G31) |
| setup costs of investment (G31) | investment (G31) |
| terms of trade (F14) | investment (G31) |
| optimistic expectations (D84) | investment (G31) |
| pessimistic expectations (D84) | investment (G31) |
| global economic environment (F01) | terms of trade (F14) |