Abstract
AbstractThis paper investigates the interlinkage in the business cycles of large‐country economies in a free‐trade equilibrium. We consider a two‐country, two‐good, two‐factor general‐equilibrium model with Cobb–Douglas technologies and linear preferences. We also assume decreasing returns in both sectors. We first identify the determinants of each country's accumulation pattern in autarky equilibrium, and secondly we show how a country's business cycle may spread throughout the world once trade opens. We prove indeed that under free trade, globalization and market integration may generate a contagion of the capital‐exporting country's business cycles and thus have destabilizing effects on the capital‐importing country.
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