Macroeconomic volatility and trade in OLG economies

Abstract

AbstractThis paper analyzes the effect of free‐trade integration on the dynamical properties of economies. We formulate a two‐country, two‐good, two‐factor overlapping generations model where countries only differ with respect to their discount rate. The main contribution of this paper is to show that opening up to international trade may have a destabilizing effect. In particular, we prove that, under perfect mobility of labor and capital between countries, sunspot cycles can occur in the trade regime although one country is characterized by saddle‐point stability in the autarky regime.