Transition Economy Convergence in a Two-Country Model
This paper presents the core of a two-country dynamic general equilibrium model of a transition economy. There are two countries in the model: an advanced economy and an emerging economy, which converges to its more advanced counterpart. The model concentrates on modeling goods and capital flows along an equilibrium balanced path of the convergence process. The model incorporates heterogeneous firms and the notion of trade costs and an endogenous â€˜tradeness of goodsâ€™ in the spirit similar to the recent models of international economics. While almost all of such international-economics models analyze steady-states equilibia of the world of symmetric countries, the contribution of the paper is to develop a simulation model, which would help policymakers in understanding the endogenous changes during transition in trade, external position, and income balances in a consistent dynamic general equilibrium framework of the two-country-world with asymmetric countries
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