Optimal Growth And Competitive Equilibrium Business Cycles Under Decreasing Returns In Two-Country Models

This paper investigates the interlinkage in the business cycles of large-country economies in free-trade equilibrium. The authors consider a two-country, two-good, two-factor general equilibrium model with Cobb-Douglas technologies and linear preferences. They also assume decreasing returns in both sectors. They first identify the determinants of each country's accumulation pattern in autarky equilibrium, and second they show how a country's business cycle may spread throughout the world once trade opens. They prove indeed that under free-trade, globalization and market integration may generate a contagion of the capital exporting country's business cycles and thus have destabilizing effects on the capital importing country.