Heterogeneous Households, the Distribution of Wealth, and the Laursen-Metzler Effect

Cem Karayalcin

Review of International Economics, 1995, vol. 3, issue 1, 86-103

Abstract: To study the effects of a terms-of-trade deterioration the paper constructs a dynamic model with heterogeneous households that maximize intertemporal utility. It shows that insofar as this shock leads to a redistribution of wealth--an outcome ignored by the literature because of the representative-agent assumption invariably adopted--it may give rise to an initial current-account deficit and nonmonotonic adjustment paths. The paper also buttresses the argument that heterogeneous-household models help explain the observed "excess smoothness" of consumption. Copyright 1995 by Blackwell Publishing Ltd.

Date: 1995
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