Working Paper: NBER ID: w8827
Authors: Assaf Razin; Efraim Sadka; Tarek Coury
Abstract: In the presence of lumpy investment cost of adjustment, globalization may have non-conventional effects on the level of investment and its cyclical behavior. Trade openness may lead to a discrete 'jump' in the level of investment, as it may trigger a discrete change in the terms of trade. Such a shift creates a sizeable boost in aggregate investment. But trade openness may also lead to boom-bust cycles of investment (namely, multiple equilibrium) supported by self-validating expectations. In this sense globalization destabilizes the economy. There can be substantial gains from globalization in the investment-boom equilibrium. However, gains could be small, or negative, in the investment-bust equilibrium.
Keywords: No keywords provided
JEL Codes: F4; E3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade openness (F43) | investment levels (F21) |
| setup costs of investment (G31) | investment levels (F21) |
| trade openness (F43) | investment cycles (G31) |
| investment cycles (G31) | investment fluctuations (G31) |
| trade openness (F43) | multiple equilibria (D50) |
| investment boom (E22) | substantial gains from globalization (F69) |
| investment bust (G24) | negligible or negative gains from globalization (F69) |