A Stochastic Dynamic Model of Trade and Growth: Convergence and Diversi?cation

Partha Chatterjee and Malik Shukayev ()
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Malik Shukayev: Bank of Canada

No 7, Working Papers from Development and Policies Research Center (DEPOCEN), Vietnam

Abstract: There is a growing literature that studies the properties of models that combine international trade and neoclassical growth theory, but mostly in a de- terministic setting. In this paper we introduce uncertainty in a dynamic Heckscher-Ohlin model and characterize the equilibrium of a small open economy in such an environment. We show that, when trade is balanced period-by-period, the per capita output and consumption of a small open economy converge to an invariant distribution that is independent of the initial wealth. Further, at the invariant distribution, there are periods in which the small economy diversi?es. Numerical simulations show that the speed of convergence increases with the size of the shocks. In the limit, when there is no uncertainty, there is no convergence and countries may specialize permanently. The paper highlights the role of market incompleteness, as a result of the period-by-period trade balance, in this setup. Through an analytical example we also illustrate the importance of country speci?c risk in delivering our results.

Keywords: Economic Growth; International Trade; Heckscher-Ohlin; Convergence; Stochastic Growth Theory; Diversi?cation; Incomplete markets; Risk. (search for similar items in EconPapers)
JEL-codes: E2 F1 F4 O4 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2013
New Economics Papers: this item is included in nep-dge and nep-mac
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Related works:
Journal Article: A stochastic dynamic model of trade and growth: Convergence and diversification (2012)
Working Paper: A Stochastic Dynamic Model of Trade and Growth: Convergence and Diversification (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:dpc:wpaper:0713

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