Trade Openness and Investment Instability

26 Pages Posted: 8 Mar 2002 Last revised: 26 Oct 2010

See all articles by Assaf Razin

Assaf Razin

Tel Aviv University - Eitan Berglas School of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Efraim Sadka

Tel Aviv University - Eitan Berglas School of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

Tarek Coury

University of Oxford

Multiple version iconThere are 2 versions of this paper

Date Written: March 2002

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.

Suggested Citation

Razin, Assaf and Sadka, Efraim and Coury, Tarek, Trade Openness and Investment Instability (March 2002). NBER Working Paper No. w8827. Available at SSRN: https://ssrn.com/abstract=303549

Assaf Razin (Contact Author)

Tel Aviv University - Eitan Berglas School of Economics ( email )

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel
+972 3 640 7303 (Phone)
+972 3 640 9908 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Efraim Sadka

Tel Aviv University - Eitan Berglas School of Economics ( email )

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel
+972 3 640 9712 (Phone)
+972 3 642 8074 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Tarek Coury

University of Oxford ( email )

Department of Economics
Manor Road Building, Manor Road
Oxford, Oxfordshire OX13UQ
United Kingdom

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