Despite an extensive literature on dynamic stability in optimal-growth models of closed economies, analogous work on internationally trading economies is scarce, focusing only on the special case of a 'small' open economy. To address this scarcity, the present paper establishes saddle-path stability of equilibrium in an infinite-horizon continuous-time model of two (large) countries that grow optimally and trade freely. The model has three products (including a non-traded capital good) and an exogenously fixed rate of growth. We also discuss briefly the dynamic-stability implications of modifying the model to have only two goods or an endogenous growth rate.

Dynamic stability, International trade, Optimal growth
Journal of Economic Dynamics and Control
Department of Economics

Brecher, R.A, Chen, Z, & Choudhri, E.U. (2005). Dynamic stability in a two-country model of optimal growth and international trade. Journal of Economic Dynamics and Control, 29(3), 583–594. doi:10.1016/j.jedc.2004.04.002