Rates of time preference and the current account in a dynamic model of perpetual youth -Should "global imbalances" always be balanced?-

Koichi Hamada and Masaya Sakuragawa
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Koichi Hamada: Research Institute for Economics & Business Administration (RIEB), Kobe University, Depertment of Economics, Yale University, USA
Masaya Sakuragawa: Faculty of Economics, Keio University

No DP2016-33, Discussion Paper Series from Research Institute for Economics & Business Administration, Kobe University

Abstract: A two-country version of the Blanchard model enables us to investigate the cross country effects of different rates of time preference in a well behaved manner. A patient country runs the current account surplus and becomes a creditor; a less patient country runs the current account deficit and becomes a debtor. Even a small difference in the rate of time preference produces a sustainable current account deficit/surplus. For example, the difference in the rate of time preference by 0.25 percent enables the impatient country to run the current account deficit of 4.8 percent of GNP. Our analysis and calibration results challenge the common sense view that global imbalances should be always balanced.

Pages: 25 pages
Date: 2016-10
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