Monopolistic competition, trade, and endogenous spatial fluctuations

This paper presents a model that exhibits the same richness of results as Krugman's (1991b, Increasing returns and economic geography, Journal of Political Economy 99, 483-499) core-periphery model and is nonetheless reducible to a system of explicit differential equations. This makes it possible to provide an analytical investigation of the conditions that support the existence of multiple equilibria and endogenous spatial fluctuations driven by self-fulfilling and self-rewarding expectations. In so doing, the paper sheds light on how impediments to trade and factor mobility can affect the relative importance of history ('initial endowments') and expectations ('initial beliefs') in determining the evolution of the spatial distribution of economic activities. (C) 2001 Elsevier Science B.V. All rights reserved.