Convergence in a Stochastic Dynamic Heckscher-Ohlin Model

We characterize the equilibrium for a small economy in a dynamic Heckscher-Ohlin model with uncertainty. We 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 our model is the presence of market incompleteness as a result of the period-byperiod trade balance. The importance of market incompleteness, and not just uncertainty, in achieving our results is illustrated through an analytical example. Further, numerical simulations show that the speed of convergence is increasing in the size of the shocks. Thus, our results extend the predictions of income convergence, standard in one sector neoclassical growth models, to the dynamic multi-country Heckscher-Ohlin environment