EXPECTATIONS-DRIVEN SPATIAL FLUCTUATIONS

I develop a dynamic spatial model with monopolistic competition, increasing returns and labor mobility. Even when shocks to preferences or technology are absent, rational expectations equilibria characterized by stationary random fluctuations in the spatial allocation of resources are shown to exist. Such fluctuations result from the interaction between forward-looking location decisions and the agglomeration/congestion economies implied by the assumptions on market structure and preferences. Welfare losses result from the unnecessary randomness of equilibrium allocations along such equilibria.