* Corresponding author. Journal of Economic Dynamics & Control 24 (2000) 97}125 Endogenous #uctuations in an open economy with increasing returns to scale Marta Aloi*, Huw D. Dixon, Teresa Lloyd-Braga  Institute of Economics, Studiestraede 6, 1455 Copenhagen, Denmark  School of Economics, University of Nottingham, University Park, NG7 2RD, Nottingham, UK  Department of Economics, University of York, Y01 5DD York, UK  Departamento de Economia, Universidade Cato & lica Portuguesa, Palma de Cima, 1600 Lisbon, Portugal Received 28 October 1996; accepted 8 June 1998 Abstract In this paper we study the e!ects 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 "xed exchange rate, where labour is the only input and money the only asset. We "nd that when there are increasing returns, the open economy may display persistent equilibrium endogenous #uctuations (deterministic and stochastic) in the balance of trade and main macroeconomic aggregates.  2000 Elsevier Science B.V. All rights reserved. JEL classixcation: D43; E32; F41 Keywords: Endogenous #uctuations; Increasing returns to scale; Small open economy 1. Introduction This paper develops a simple model of a small open economy showing how persistent #uctuations in the balance of trade and main macroeconomic aggreg- ates can arise into the system without appealing to shocks to the fundamentals. 0165-1889/00/$ - see front matter  2000 Elsevier Science B.V. All rights reserved. PII: S 0 1 6 5 - 1 8 8 9 ( 9 8 ) 0 0 0 6 3 - 3