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Convergence in a Stochastic Dynamic Heckscher-Ohlin Model

  • Partha Chatterjee
  • Malik Shukayev

The authors characterize the equilibrium for a small economy in a dynamic Heckscher-Ohlin model with uncertainty. They 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, with probability one there are some periods in which the small economy diversifies. These results are in sharp contrast with those of deterministic dynamic Heckscher-Ohlin models, in which permanent specialization and non-convergence occur. One key feature of the authors' model is the presence of market incompleteness as a result of the period-by-period trade balance. The importance of market incompleteness, and not just uncertainty, in achieving the authors' results is illustrated through an analytical example. Further, numerical simulations show that the convergence occurs more quickly as the magnitude of the shocks increases. Thus, the results extend the predictions of income convergence, standard in one-sector neoclassical growth models, to the dynamic multicountry Heckscher-Ohlin environment.

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Paper provided by Bank of Canada in its series Working Papers with number 06-23.

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Length: 60 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:bca:bocawp:06-23
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  1. Hopenhayn, Hugo A & Prescott, Edward C, 1992. "Stochastic Monotonicity and Stationary Distributions for Dynamic Economies," Econometrica, Econometric Society, vol. 60(6), pages 1387-406, November.
  2. Clarida, Richard H, 1987. "Consumption, Liquidity Constraints and Asset Accumulation in the Presence of Random Income Fluctuations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(2), pages 339-51, June.
  3. Gary Chamberlain & Charles A. Wilson, 2000. "Optimal Intertemporal Consumption Under Uncertainty," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(3), pages 365-395, July.
  4. Chatterjee, Partha & Shukayev, Malik, 2008. "Note on positive lower bound of capital in the stochastic growth model," Journal of Economic Dynamics and Control, Elsevier, vol. 32(7), pages 2137-2147, July.
  5. 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.
  6. Ventura, Jaume, 1997. "Growth and Interdependence," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 57-84, February.
  7. Aiyagari, S Rao, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 659-84, August.
  8. Andrew Atkeson & Patrick J. Kehoe, 2000. "Paths of development for early- and late-bloomers in a dynamic Heckscher-Ohlin model," Staff Report 256, Federal Reserve Bank of Minneapolis.
  9. Zhiqi Chen, 1992. "Long-Run Equilibria in a Dynamic Heckscher-Ohlin Model," Canadian Journal of Economics, Canadian Economics Association, vol. 25(4), pages 923-43, November.
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