Endogenous fluctuations in an open economy with increasing returns to scale

In this paper we study the effects of opening an economy, with increasing returns in the production of nontraded goods, on the existence of multiple Pareto-ranked stationary equilibria, local indeterminacy and bifurcations. We consider a standard overlapping generation model of a small open economy, with a fixed exchange rate, where labour is the only input and money the only asset. We find that when there are increasing returns, the open economy may display persistent equilibrium endogenous fluctuations (deterministic and stochastic) in the balance of trade and main macroeconomic aggregates.