NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Trade Openness and Investment Instability

Assaf Razin, Efraim Sadka, Tarek Coury

NBER Working Paper No. 8827
Issued in March 2002
NBER Program(s):   ITI

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.

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Document Object Identifier (DOI): 10.3386/w8827

Published: Razin, Assaf, Efraim Sadka and Tarek Coury. “Trade openness, investment instability, and terms-oftrade volatility.” Journal of International Economics 59, 2 (2003).

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