DP1327 Monopolistic Competition, Trade, and Endogenous Spatial Fluctuations

Author(s): Gianmarco Ottaviano
Publication Date: February 1996
Keyword(s): Increasing Returns, International Trade, Monopolistic Competition, Spatial Fluctuations
JEL(s): E32, F12, F22, R12
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1327

This paper investigates the possibility of endogenous fluctuations in the international distribution of economic activities in the presence of increasing returns, monopolistic competition, trade and convex adjustment costs without allowing for any local productive externalities. Using a two-country dynamic general equilibrium model, it derives necessary and sufficient conditions for the existence of self-reinforcing relocation processes. It shows that the occurrence of multiple equilibria and endogenous fluctuations is associated with a high degree of increasing returns to scale as well as low trade and adjustment costs. Under such circumstances relocation processes are driven by self-fulfilling expectations