A hydrodynamic model of high resolution is used to examine the stability of coronal loops to finite amplitude perturbations. The loop is heated by means of a low-amplitude energy input and its subsequent dynamic relaxation is followed.Firstly, the initial atmosphere is generated by solving the time independent form of the hydrodynamic equations. It is shown that the loop structure depends critically on the balance between the radiative losses and the quiescent heating at the base of the transition zone, i.e. on the concavity of the temperature profile in this region. This result already anticipates the need for high spatial resolution across the model transition zone.The dynamic evolution of the loop is then investigated for two classes of lower boundary conditions. In one case the chromospheric temperature is fixed throughout the simulation; in the other the low chromosphere is represented by a rigid insulating barrier. In both cases the loop is found to be stable: The loop is also unique to the extent that it relaxes to a state which is physically indistinguishable from its initial configuration. It is pointed out however, that a loop whose chromosphere is only marginally stable can evolve dynamically away from the initial static configuration.Finally, the observational consequences of the analysis are discussed. The differential emission measure profile is found to change its form as the loop cools, firstly, through an evaporative phase in which the coronal density increases; secondly, through a quasi-steady relaxation in which the enhanced coronal density gradually drains away to the chromosphere. This behaviour represents a possible observational test of the model.