Dynamics, Stability, and Openness in an Endogenous Growth Model with Firm Heterogeneity

This study aims to examine the transitional dynamics and stability of an endogenous growth model with firm heterogeneity. In general, even if trade liberalization promotes economic growth in the long run, it does not mean that free trade will always enhance growth rate. The main purpose of this study is to analyze the effects of trade liberalization policy on the transitional dynamic path with the numerical solution method.Our main finding is that trade liberalization has different effects on the transitional path depending on the initial stock variables. In a knowledge-scarce economy, free trade raises the economic growth rate at any point in the growth path. In a knowledge-abundant economy, the economic growth rate falls temporarily for some intervals due to free trade, which replicates the temporal decline around the trade liberalization described in previous empirical research. This study also shows that international trade can promote economic growth even if international knowledge spillovers do not occur