Working Paper: NBER ID: w9332
Authors: Assaf Razin; Efraim Sadka; Tarek Coury
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.
Keywords: No keywords provided
JEL Codes: F1; F3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade openness (F43) | investment cycles (G31) |
| trade openness (F43) | terms of trade volatility (F14) |
| terms of trade volatility (F14) | investment instability (E22) |
| investment cycles (G31) | self-fulfilling expectations (D84) |
| setup costs (G31) | investment cycles (G31) |
| setup costs (G31) | terms of trade effects (F14) |
| trade openness (F43) | multiple equilibria (D50) |
| higher setup costs (D29) | susceptibility to cycles (E32) |
| excessive volatility of terms of trade (F14) | investment cycles (G31) |