In Discussion Paper No. 1327, Research Affiliate Gianmarco Ottaviano 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 differs from existing works for two main reasons. First, it does not require elusive concepts such as ad hoc `local spillovers' to obtain complementarities between agents' location decisions. Second, it introduces trade between different locations to shed some light on the influence of trade barriers on the dynamics of the international allocation of production.

The paper 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. The contribution is closely related to recent works on the international location effects of trade barriers showing that the explicit simultaneous consideration of increasing returns and trade costs generates complementarities between the location decisions of different agents and gives rise to cumulative location processes and multiple spatial equilibria.