PROOF OF GLOBAL STABILITY, TRANSITIONAL DYNAMICS, AND INTERNATIONAL CAPITAL FLOWS IN A 2-COUNTRY MODEL OF INNOVATION AND GROWTH

Global stability properties of dynamic two-country models can be easil y studied in the case of perfect international capital flows. With int ernationally constant relative productivities, balanced-growth path va lues for factor prices will hold on any path leading to the balanced-g rowth path unless one country experiences a period of no innovation. I nnovation rates converge in the case of perfect international knowledg e spillovers but long-run consumption levels and trade patterns are pa th-dependent. GDP per capita is predicted to converge slowly despite t he presence of perfect international capital markets and no explicit i nclusion of adjustment costs. The trade balance of the rich country is initially positive but after some time turns into a deficit.