Time Preference and International Lending and Borrowing in an Overlapping-Generations Model
Two economies, represented by Diamond-type overlapping-generations models and differing only in their pure rates of time preference, are joined together. Capital formation, balance-of-payments behavior, and welfare are compared under autarky and openness. With a positive natural rate of growth, the low-time-preference country runs a current account surplus in the steady state but not necessarily outside it. If preexisting capital is not shiftable between countries, integration in the world economy makes the high-time-preference country worse off in the short run. The ranking of stationary utility levels under autarky and openness is ambiguous.
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