TY - JOUR
T1 - Trade openness, investment instability and terms-of-trade volatility
AU - Razin, Assaf
AU - Sadka, Efraim
AU - Coury, Tarek
PY - 2003/12
Y1 - 2003/12
N2 - 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.
AB - 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.
KW - Lumpy adjustment cost of investment
KW - Multiple equilibria
KW - Terms-of-trade volatility
KW - Trade openness
UR - http://www.scopus.com/inward/record.url?scp=0141873042&partnerID=8YFLogxK
U2 - 10.1016/S0022-1996(03)00014-X
DO - 10.1016/S0022-1996(03)00014-X
M3 - ???researchoutput.researchoutputtypes.contributiontojournal.article???
AN - SCOPUS:0141873042
SN - 0022-1996
VL - 61
SP - 285
EP - 306
JO - Journal of International Economics
JF - Journal of International Economics
IS - 2
ER -