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A stochastic dynamic model of trade and growth: Convergence and diversification

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  • Chatterjee, Partha
  • Shukayev, Malik

Abstract

There is a growing literature that studies the properties of models that combine international trade and neoclassical growth theory, but mostly in a deterministic 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 diversifies. 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 specific risk in delivering our results.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 36 (2012)
Issue (Month): 3 ()
Pages: 416-432

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Handle: RePEc:eee:dyncon:v:36:y:2012:i:3:p:416-432

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Web page: http://www.elsevier.com/locate/jedc

Related research

Keywords: Economic growth; International trade; Heckscher–Ohlin; Stochastic growth theory; Convergence; Diversification; Incomplete markets; Risk;

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  1. Brock, William A. & Mirman, Leonard J., 1972. "Optimal economic growth and uncertainty: The discounted case," Journal of Economic Theory, Elsevier, vol. 4(3), pages 479-513, June.
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Citations

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Cited by:
  1. Takashi Kamihigashi & John Stachurski, 2010. "Stochastic Stability in Monotone Economies," Discussion Paper Series DP2010-12, Research Institute for Economics & Business Administration, Kobe University.
  2. Takashi Kamihigashi & John Stachurski, 2011. "Existence, Stability and Computation of Stationary Distributions: An Extension of the Hopenhayn-Prescott Theorem," Discussion Paper Series DP2011-32, Research Institute for Economics & Business Administration, Kobe University.
  3. Takashi Kamihigashi & John Stachurski, 2011. "Stability of Stationary Distributions in Monotone Economies," ANU Working Papers in Economics and Econometrics 2011-561, Australian National University, College of Business and Economics, School of Economics.
  4. Takashi Kamihigashi & John Stachurski, 2012. "Existence, Uniqueness and Stability of Stationary Distributions: An Extension of the Hopenhayn-Prescott Theorem," Discussion Paper Series DP2012-27, Research Institute for Economics & Business Administration, Kobe University.

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