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International Lending and Borrowing in a Stochastic Sequence Equilibrium

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  • Richard H. Clarida

Abstract

This paper is a theoretical investigation of international lending and borrowing in the context of a general equilibrium model in which national productivities are subject to random fluctuations and rates of time preference differ among countries. International capital flows arise from the efforts of risk-averse households situated in different countries to self-insure against random productivity fluctuations. We establish the existence of a rational expectations equilibrium in which the world interest rate is constant and strictly less than the rate of time preference of the least impatient countries. The rate of time preference, solvency restrictions on borrowing, and balanced-budget fiscal policies are rigorously analyzed.

Suggested Citation

  • Richard H. Clarida, 1986. "International Lending and Borrowing in a Stochastic Sequence Equilibrium," NBER Working Papers 1944, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:1944
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    References listed on IDEAS

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    1. Buiter, Willem H, 1981. "Time Preference and International Lending and Borrowing in an Overlapping-Generations Model," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 769-797, August.
    2. Obstfeld, Maurice, 1983. "Intertemporal price speculation and the optimal current-account deficit," Journal of International Money and Finance, Elsevier, vol. 2(2), pages 135-145, August.
    3. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-220, April.
    4. Helpman, Elhanan & Razin, Assaf, 1982. "Dynamics of a Floating Exchange Rate Regime," Journal of Political Economy, University of Chicago Press, vol. 90(4), pages 728-754, August.
    5. Dornbusch, Rudiger, 1983. "Real Interest Rates, Home Goods, and Optimal External Borrowing," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 141-153, February.
    6. Schechtman, Jack, 1976. "An income fluctuation problem," Journal of Economic Theory, Elsevier, vol. 12(2), pages 218-241, April.
    7. repec:bla:scandj:v:84:y:1982:i:2:p:147-59 is not listed on IDEAS
    8. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-987, December.
    9. Scheinkman, Jose A & Weiss, Laurence, 1986. "Borrowing Constraints and Aggregate Economic Activity," Econometrica, Econometric Society, vol. 54(1), pages 23-45, January.
    10. Danthine, Jean-Pierre & Donaldson, John B, 1981. "Stochastic Properties of Fast vs. Slow Growing Economies," Econometrica, Econometric Society, vol. 49(4), pages 1007-1033, June.
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    Cited by:

    1. Peter Englund & Anders Vredin, 1990. "The current account, supply shocks and accommodative fiscal policy : interpretations of Swedish post-war data," Finnish Economic Papers, Finnish Economic Association, vol. 3(2), pages 89-107, Autumn.

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