In this paper we study the effects of opening an economy, with increasing r
eturns in the production of nontraded goods, on the existence of multiple P
areto-ranked stationary equilibria, local indeterminacy and bifurcations. W
e 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 o
nly 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.
(C) 2000 Elsevier Science B.V. All rights reserved.