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.
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Publisher Info
Paper provided by University at Albany, SUNY, Department of Economics in its series Discussion Papers with number
00-01.
Length: 35 pages Date of creation: 2000 Date of revision: Handle: RePEc:nya:albaec:00-01
Contact details of provider: Postal: Department of Economics, BA 110 University at Albany State University of New York Albany, NY 12222 U.S.A. Phone: (518) 442-4735 Fax: (518) 442-4736