DP1749 | The Core-Periphery Model and Endogenous Growth

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This paper presents a model in which long-run growth and industrial location are jointly endogenous. Specifically, it introduces Romer-Grossman-Helpman endogenous growth into Krugman?s core-periphery model with footloose labour. The paper focuses on stability of the symmetric equilibrium, showing that growth is a powerful destabilising force. For instance, even with prohibitive trade barriers, the symmetric equilibrium is unstable as long as workers? discount rates are not too high. It also shows that inter-regional learning spillovers are a stabilizing force. Finally, the paper shows that agglomeration of industry is favourable to growth in both regions, so positive growth effects might offset the well-known static welfare loss that the periphery experiences when the core-periphery outcome occurs.