http://worldcat.org/entity/work/id/57894533

Convergence in a stochastic dynamic Heckscher-Ohlin model

This working paper is part of a series that examines a range of economic and financial issues of interest to bankers, economists and policymakers. It characterizes the equilibrium for a small economy in a dynamic Heckscher-Ohlin model with uncertainty. It shows 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 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.

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