Trade and indeterminacy revisited

• Date: 01 March 2019
• Published date: 01 March 2019
• Author: Kazuo Nishimura,Kazumichi Iwasa,Makoto Yano
• DOI: http://doi.org/10.1111/ijet.12205

doi: 10.1111/ijet.12205

Trade and indeterminacy revisited

Kazumichi Iwasa,∗Kazuo Nishimura∗and Makoto Yano†

We consider a dynamic two-country model of trade with production externalities with an em-

phasis on the possibility of global indeterminacy, which means that the distribution of capital

stocks in each country in the long run depends on households’ expectations. Opening trade

yields expectation-driven fluctuations. Global indeterminacy may occur around the free trade

steady states even when the autarkic steady states aresaddle points in both countries, and it must

happen when local indeterminacy occurs around the autarkic steady states in both countries.

Key wor ds two-country model, Heckscher–Ohlin, externality,indeterminacy

JEL classification E13, E32, F11, F43

Accepted 27 September 2018

1 Introduction

This paper re-examines the dynamic Heckscher–Ohlin model developed in Nishimura and Shimo-

mura (2002) with an emphasis on whether opening trade causes stabilizing or destabilizing effects

on the world trade market. Equilibrium paths are defined as globally indeterminate if, for given any

initial capital stocks, the steady-state capital stocks to which the equilibrium path convergeswill var y

depending households’ expectations. Opening trade is considered to have a destabilizing effect if it

yields global indeterminacy of the equilibrium paths. In fact, we will show that (i) a destabilizing

effect is possible if the unique steady state in autarky for each country is a saddle point, and (ii) it

must be true if local indeterminacy occurs in autarky in both countries.

Many studies have examined the linkage between trade and economic fluctuations. Nishimura

and Yano (1993) and Nishimura et al. (2006, 2014) used discrete time models with asymmetric

technologies across countries to show that opening trade can yield two-period cycles even if cycles

in autarky do not occur. Ghiglino and Olszak-Duquenne (2001) and Ghiglino (2007) considered a

two-sector model without international technological differences and examined the effect of market

integration on the stability of steady states.

Ghiglino and Olszak-Duquenne (2001) showed that without production externalities, market

integration may destabilize the world economy, while Ghiglino (2007) demonstrated that with ex-

ternalities, market integration may yield indeterminacy. However, both papers confirmed that with

∗Research Institute for Economics and Business Administration, Kobe University, Nada, Kobe, Japan. Email:

nishimura@rieb.kobe-u.ac.jp

†Research Institute of Economy, Tradeand Industr y,Chiyoda, Tokyo,Japan.

This work was supported by the Japan Society for Promotion of Science, Grants-in-Aid for Research #15H05729,

#16H0233598 and for Specially Promoted Research#23000001.

International Journal of Economic Theory 15 (2019) 37–51 © IAET 37

International Journal of Economic Theory