Transitional dynamics, convergence and international capital flows in two-country models of innovation and growth

Global stability properties of dynamic two-country models can be easily studied in the case of international capital flows and simple capital market no-arbitrage conditions. With internationally constant relative productivities, long-run balanced growth path values for factor prices will hold on any equilibrium path unless one country experiences a period of no innovation. Innovation rates converge in the case of perfect international knowledge spillovers but long-run consumption levels and trade patterns are path dependent. The trade balance of the rich country is initially positive but after some time turns into a deficit.