Foreign Trade and Equilibrium Indeterminacy

Abstract

We show that dependence of production on foreign inputs (or non-producible natural resources) can significantly increase the likelihood of indeterminacy. Payment of imported foreign factors of production may act as a semi-fixed cost, amplifying production externalities and returns to scale, making selffulfilling expectations driven busyness cycles easier to arise. This is demonstrated using a standard neoclassical growth model. Calibration exercise shows that the required increasing returns to scale can be reduced by as much as 64% based on estimated share of foreign inputs in production for OECD countries.Indeterminacy, Factor Imports, Natural Resources, Capacity Utilization, Externality, Returns to Scale, Open Economy, Sunspots, Self- Fulfilling Expectations.