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Macroeconomic Volatility and Trade in OLG Economies

Author

Listed:
  • Antoine Le Riche

    (Aix-Marseille University (Aix-Marseille School of Economics), GREQAM, CNRS & EHESS)

Abstract
This chapter analyzes the effect of international trade on the local stability properties of economies in a Heckscher-Ohlin free-trade equilibrium. We formulate a two-factor (capital and labor), two-good (consumption and investment), two-country overlapping generations model where countries only differ with respect to their discount rate. We consider a CES non increasing returns to scale technology in the consumption good sector and a Leontief constant returns to scale technology in the investment good sector. In the autarky equilibrium and the free-trade equilibrium, we show the existence of endogenous cycles with dynamic efficiency when the consumption good is capital intensive, the value of the elasticity of intertemporal substitution in consumption is intermediate and the degree of returns to scale is sufficiently high. Finally using a numerical simulation, we show that period-two cycles can occur in the free-trade equilibrium although one country is characterized by saddle-point stability in the autarky equilibrium.

Suggested Citation

  • Antoine Le Riche, 2014. "Macroeconomic Volatility and Trade in OLG Economies," AMSE Working Papers 1446, Aix-Marseille School of Economics, France, revised Nov 2014.
    • Handle: RePEc:aim:wpaimx:1446
    as

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    File URL: http://www.amse-aixmarseille.fr/sites/default/files/_dt/2012/wp_2014_-_nr_46.pdf
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    References listed on IDEAS

    as
    1. Kazumichi Iwasa & Kazuo Nishimura, 2014. "Dynamic two-country Heckscher–Ohlin model with externality," International Journal of Economic Theory, The International Society for Economic Theory, vol. 10(1), pages 53-74, March.
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    3. Jess Benhabib & Kazuo Nishimura, 2012. "Indeterminacy and Sunspots with Constant Returns," Springer Books, in: John Stachurski & Alain Venditti & Makoto Yano (ed.), Nonlinear Dynamics in Equilibrium Models, edition 127, chapter 0, pages 311-346, Springer.
    4. Nourry, Carine & Venditti, Alain, 2011. "Local indeterminacy under dynamic efficiency in a two-sector overlapping generations economy," Journal of Mathematical Economics, Elsevier, vol. 47(2), pages 164-169, March.
    5. Drugeon, Jean-Pierre & Nourry, Carine & Venditti, Alain, 2010. "On efficiency and local uniqueness in two-sector OLG economies," Mathematical Social Sciences, Elsevier, vol. 59(1), pages 120-144, January.
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    8. Grandmont, Jean-Michel & Pintus, Patrick & de Vilder, Robin, 1998. "Capital-Labor Substitution and Competitive Nonlinear Endogenous Business Cycles," Journal of Economic Theory, Elsevier, vol. 80(1), pages 14-59, May.
    9. Hu, Yunfang & Mino, Kazuo, 2013. "Trade structure and belief-driven fluctuations in a global economy," Journal of International Economics, Elsevier, vol. 90(2), pages 414-424.
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    11. Claustre Bajona & Timothy J. Kehoe, 2006. "Demographics in dynamic Heckscher-Ohlin models: overlapping generations versus infinitely lived consumers," Staff Report 377, Federal Reserve Bank of Minneapolis.
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    15. Takahashi, Harutaka & Mashiyama, Koichi & Sakagami, Tomoya, 2012. "Does The Capital Intensity Matter? Evidence From The Postwar Japanese Economy And Other Oecd Countries," Macroeconomic Dynamics, Cambridge University Press, vol. 16(S1), pages 103-116, April.
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    More about this item

    Keywords

    Two-sector OLG model; two-country; local indeterminacy; Endogenous fluctuations; dynamic efficiency;
    All these keywords.

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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