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THE INSTABILITY OF OPEN PARETO EFFICIENT ECONOMIES

Published online by Cambridge University Press:  21 July 2020

Antoine Le Riche
Antoine Le Riche*
Affiliation:
Sichuan University
*
Address correspondence to: Antoine Le Riche, School of Economics, Sichuan University, No. 24 South Section 1, Yihuan Road, Chengdu, China, 610065. e-mail: antoineleriche@scu.edu.cn. Phone: +86 28 85412504. Fax: +86 28 85470032.
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Abstract

This paper analyzes the impact of trade on the stability properties of trading countries and on stationary welfare. We consider a two-country two-good two-factor overlapping generations model where countries differ in terms of their technology. In the autarky equilibrium and the free-trade equilibrium, indeterminacy relies, under dynamic efficiency, on a capital intensive consumption good and intermediate values of the elasticity of intertemporal substitution in consumption. Opening the borders to trade can be a source of a global destabilizing effect. Indeed, considering a free-trade equilibrium in which one country is an exporter of the consumption good and the other country is an exporter of the investment good, indeterminacy can occur with trade even though the two countries are determinate in autarky. Finally, opening to trade increases the stationary welfare of the country that exports the investment good and deteriorates the one of the other country.

Keywords

Two-Sector ModelTwo-CountryLocal IndeterminacyStationary Welfare
Type
Articles
Information
Macroeconomic Dynamics , Volume 26 , Issue 3 , April 2022 , pp. 613 - 648
Copyright
© Cambridge University Press 2020

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Footnotes

This paper is dedicated to the memory of Carine Nourry. I would like to warmly thank one anonymous referee and the Associate Editor for their precious comments and suggestions. I am grateful to Stefano Bosi, Raouf Boucekkine, Wentao Fu, Zhiming Fu, François Langot, Francesco Magris, Kazuo Nishimura, Carine Nourry, Antoine Parent, Thomas Seegmuller, Ahmed Tritah, Alain Venditti, and Lei Zhang for useful comments and suggestions. This paper benefited from presentation at the “Doctoral Workshop on Dynamics Macroeconomics,” Strasbourg, France, June 2014, at the general seminar of GAINS, Le Mans, France, November 2014, at the “Association for the Development of Research in Economics and Statistics” conference, Paris, France, February 2015, at “Public Economic Theory” conference, Rio de Janeiro, Brazil, July 2016, at the seminar of Sichuan University, Chengdu, China, October 2018 and the “International Conference on Applied Finance, Macroeconomic Performance and Economic Growth,” Hangzhou, China, October 2018. This research is supported by the National Natural Science Foundation of China project numbers 71742004 and 71673194. Any errors are my own.

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