how to specify local modules as npm package dependencies

See: Local dependency in package.json

It looks like the answer is npm link: https://docs.npmjs.com/cli/link

npm install now supports this

npm install --save ../path/to/mymodule

For this to work mymodule must be configured as a module with its own package.json. See Creating NodeJS modules.

As of npm 2.0, local dependencies are supported natively. See danilopopeye's answer to a similar question. I've copied his response here as this question ranks very high in web search results.

This feature was implemented in the version 2.0.0 of npm. For example:

{
  "name": "baz",
  "dependencies": {
    "bar": "file:../foo/bar"
  }
}

Any of the following paths are also valid:

../foo/bar
~/foo/bar
./foo/bar
/foo/bar

syncing updates

Since npm install <folder> adds the package in the directory as a symlink in the current project any changes to the local package are automatically synced.