Transfer and the Intertemporal Terms of Trade

Slobodan Djajic, Sajal Lahiri and Pascalis Raimondos ()

No 96-20, EPRU Working Paper Series from Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics

Abstract: This paper examines the effects of a transfer on the intertemporal terms of trade in the context of a simple two-country, two-period model. When intertemporal trade occurs because the two economies have different rates of time preference, a transfer entails an improvement in the terms of trade of the paying country. Alternatively, when trade occurs due to international differences in the endowments of goods over the two periods, the effect of a transfer on the terms of trade depends on (a) the relationship between the world rate of interest and the rates of time preference of the two countries and (b) the relationship between the elasticities of intertemporal consumption substitution of the donor and the recipient.

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