Trade Structure and Equilibrium Indeterminacy in a Two-Country Model

Abstract

This paper explores a dynamic two-country model with production externalities in which capital goods are not traded and international lending and borrowing are allowed. Unlike the integrated world economy model based on the Heckscher-Ohlin setting, our model yields indeterminacy of equilibrium under a wider set of parameter values than in the corresponding closed economy model. Our finding demonstrates that the assumption on trade structure would be a relevant determinant in considering the relation between globalization and economic volatility.