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Keywords:

  • difference game;
  • economic growth;
  • intermediate goods
  • C73;
  • F15

ABSTRACT

Two countries face a strategic interdependence in producing intermediate goods. Producing these intermediate goods requires both domestic capital and another imported intermediate good. Individually, both economies determine a balanced growth path by taking into account this interdependence in different grades of awareness. By allowing for strategic interactions in the analysis, we adapted a two-agent dynamic setting and find an interior Markov perfect equilibrium as well as an open-loop equilibrium reflecting these different degrees of reaction. We find that main results resemble each other but growth rates will be higher when strategies are dynamically updated.