Foreign investiment and convergence

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In a model of two open economies with intertemporaloptimization, we characterize optimal paths toward convergence anti show that the richer country achieves higher utility than it would in autarchy, while the poorer country's convergence toward the steady state is speeded up. However, the short-term effects offree trade andfree capital flows on the richer economy are negative in terms of wages anti consumption. The richer country will maintain its assets in the poor country indefinitely.