Saving Rates, Trade, Technology, and Stochastic Dynamics

Abstract

This paper develops a framework for analyzing the stochastic dynamics of small growing trading economies with CES sector technologies. The open neoclassical two‐sector growth model with a diffusion process (uncertainty) for the aggregate saving/investment ratio is demonstrated with sample paths and long‐run probability distributions of the overall factor endowment ratio. Stochastic endogenous growth and cycles require a combination of fundamental growth parameter values: saving rates, terms of trade, and sectorial substitution elasticities.