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Working Paper 2005-041A

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"Foreign Trade and Equilibrium Indeterminacy"
by Luís Aguiar-Conraria, and Yi Wen

We show that dependence of production on foreign inputs (or non-producible natural resources) can significantly increase the likelihood of indeterminacy. Payment of imported foreign factors of production may act as a semi-fixed cost, amplifying production externalities and returns to scale, making self-fulfilling expectations driven busyness cycles easier to arise. This is demonstrated using a standard neoclassical growth model. Calibration exercise shows that the required increasing returns to scale can be reduced by as much as 64% based on estimated share of foreign inputs in production for
OECD countries.

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Category > Monetary Policy/Macroeconomics
Author > Yi Wen