Abstract
We examine the effects of home bias in preferences in a two country model of endogenous growth without markets for international lending and borrowing. We show that the presence of a consumer preference for domestic goods can result in a multiplicity of prices consistent with trade balance when the elasticity of substitution between goods is sufficiently low. However, the uniqueness condition is always satisfied when home bias is due to transport costs. We derive conditions for existence, uniqueness, and saddle path stability of the balanced growth path. We also examine the effect of home bias on the terms of trade and the speed of convergence to the balanced growth path.
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