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Capital Accumulation and the Current Account in a Two-Country Model

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  • Michael B. Devereux
  • Shouyong Shi

Abstract

This paper looks at the joint determination of international indebtedness and capital accumulation in a two-country model. National rates of time preference are endogenous, and adjust along an optimal path to come into equality with one another in the steady state. A country's level of indebtedness is positively related to its degree of 'impatience', and its technology advantage, and negatively related to the share of government spending in GDP. Steady state creditor countries tend to have current account surpluses during episodes of world output growth, and vice versa for debtor countries. This gives rise to a possible nonmonotonic adjustment in the current account and in consumption.

Suggested Citation

  • Michael B. Devereux & Shouyong Shi, 1989. "Capital Accumulation and the Current Account in a Two-Country Model," Working Paper 761, Economics Department, Queen's University.
    • Handle: RePEc:qed:wpaper:761
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    Keywords

    capital ; economic models ; debt;
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