Disequilibrium growth theory in an international perspective

An analysis is presented of a 2-good small open economy characterized by sluggish real wage rate adjustment. This causes short-run unemployment or excess-demand on the labor market, which in turn affects the speed of capital accumulation. Global stability is ensured if laborers receive the profits or if capital-owners receive the profits and save less than laborers. Otherwise, if capital-owners receive the profits and save more than laborers, local stability and "box" stability hold, but endless cycles cannot be excluded. Both short-run disequilibrium and income redistribution may have long-run effects, i.e., may affect the long-run capital-labor ratio. The model is applied to examine the dynamic implications of a change in the terms-of-trade and of real wage rigidity.