Multiple equilibria and welfare effects of transfers in a two-country dynamic general equilibrium model

This paper examines the relationship between the dynamic stability of steady state equilibrium and the welfare effects of international transfers in a two-country dynamic Heckscher–Ohlin model. We find that local stability properties of the steady state equilibrium may link closely to the welfare aspect of international transfers. When the two consumption goods exhibit asymmetric properties with respect to income change, multiple steady state equilibria are possible. The usual donor-loss, recipient-benefit result prevails at the saddle-point stable steady state. When a continuum of equilibrium paths exists around one steady state (indeterminacy), transfer paradoxes may occur. Furthermore, we examine the welfare effects of endogenously determined transfers. When international transfers are voluntary unrequited, a positive optimal transfer benefits both the donor and the recipient country. When the optimal transfer is negative, a positive transfer may still benefit the donor country when the world economy starts from an indeterminate steady state.