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Net foreign asset positions and consumption dynamics in the international economy

  • Ghironi, Fabio
  • Iscan, Talan B.
  • Rebucci, Alessandro

We examine the effect of non-zero, steady-state foreign assets on consumption dynamics in response to productivity shocks in a two-country, dynamic, general equilibrium model. The model generates non-zero steady-state net foreign assets by allowing for different discount factors across countries. As a consequence of discounting differences, individual steady-state consumption profiles are tilted upward or downward. Worldwide shocks to long-run productivity levels lead to dynamics that are absent in standard, symmetric models with equal discount factors. We then compare the model results to those of a VAR in common trend representation for the U.S. versus the rest of the G7. In the data, we find that permanent worldwide productivity shocks lead to net foreign asset and consumption dynamics that are broadly consistent with interpreting the U.S. as the relatively impatient model economy and are not consistent with symmetric models with equal discount factors.

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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 27 (2008)
Issue (Month): 8 (December)
Pages: 1337-1359

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Handle: RePEc:eee:jimfin:v:27:y:2008:i:8:p:1337-1359
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