Chaos in the core-periphery model

This paper shows that the standard continuous-time core-periphery model (the foundation of the New Economic Geography) is not robust; simply reformulating it in discrete time has profound implications. The continuous-time model can only exhibit stationary long-term behavior, and high transport costs are perceived as stabilizing. In contrast, the discrete-time model can exhibit cycles of any periodicity or chaotic behavior, and high transport costs are de-stabilizing. Furthermore, the sensitive dependence of long-term behavior on initial conditions and on parameters is so acute and so pervasive that it seriously calls into question reliance on propositions derived from the continuous-time model. (c) 2005 Elsevier B.V. All rights reserved.