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On the Role of the Rate of Time Preference in Macroeconomics: A Survey

In: International Trade and Economic Dynamics

Author

Listed:
  • Koichi Hamada

    (Yale University)

  • Yosuke Takeda

    (Sophia University)

Abstract

This chapter surveys the literature on the role of the rate of time preference in macroeconomics. The tradition of Bohm-Bawerk (The positive theory of capital, MacMillan, London, 1891) and Fisher (The theory of interest, MacMillan, New York, NY, 1930) to contemplate on nature and causes of time discount was distilled by Samuelson (1937) in his elegant formulation of the discounted utility (DU) model, which almost dominated the profession for a long time. As noted by Koop-mans (Econometrica 28:287–309, 1960) and Ramsey (Econ J 38:543–559, 1928), time consistency is a key postulate required for the DU formulation. Following Stroz (Rev Econ Stud 23:165–180,1955), Phelps and Pollak (Rev Econ Stud 35:185–199, 1968) and Laibson (Q J Econ 112:443–477,1997) explored a game-theoretic situation where the present self has a conflict with the future selves. Laibson's hyperbolic discounting, motivated by the psychological and experimental findings that people tend to discount the immediate future more than the distant one, opens up a wide perspective in macroeconomics. Also, large accumulation of international debts can be attributed to the difference in time discount rates among nations.

Suggested Citation

  • Koichi Hamada & Yosuke Takeda, 2009. "On the Role of the Rate of Time Preference in Macroeconomics: A Survey," Springer Books, in: Takashi Kamihigashi & Laixun Zhao (ed.), International Trade and Economic Dynamics, pages 393-420, Springer.
  • Handle: RePEc:spr:sprchp:978-3-540-78676-4_27
    DOI: 10.1007/978-3-540-78676-4_27
    as

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