Precautionary Saving, the Current Account, and the International Distribution of Wealth

Kenneth Beauchemin and Betty Daniel

Discussion Papers from University at Albany, SUNY, Department of Economics

Abstract: This paper studies the interaction between time preference heterogeneity and precautionary saving in generating both persistent current account imbalance and a stationary equilibrium distribution of wealth across countries. We use numerical techniques to present two sets of results. First, when differences in discount factors are permanent and income is stochastic, the relatively patient country runs a current account surplus in transition to a steady state equilibrium. The impatient agent's precautionary motive to save yields an equilibrium distribution of wealth with no mass on the borrowing constraint. Second, when the difference in discount factors is stochastic, but highly persistent, persistent current account imbalance becomes a feature of equilibrium. Again, the precautionary motive keeps the economy out of corners. Together, stochastic discount factors and the precautionary motive imply an international distribution of wealth roughly consistent with data.

Keywords: current account; uncertainty; precautionary saving (search for similar items in EconPapers)
JEL-codes: D91 E21 F32 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2000
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