Time Preference and International Lending and Borrowing in an Overlapping-Generations Model

Abstract

Two economies, each represented by a Diamond-type overlapping generations model, are joined together. Capital formation and welfare are compared under autarky and openness. Most of the analysis concentrates on the case where the two countries only differ in their pure rates of time preference. The following propositions are established: 1. If the rate of population growth is positive, the country with the higher value of consumption while young has a current account deficit in the steady state. 2. The country with the higher pure rate of time preference has a steadystate current account deficit. 3. If the model is stable, the common open economy steady-state capital-labor ratio lies between the two autarky capital-labor ratios'. 4. Outside the steady state, the country with the higher pure rate of time preference will not necessarily be the one to run a current account deficit. 5. The welfare of the old generation alive when the two autarkic countries join in open economy is unaffected by this international economic integration. The welfare of the young generation in the country with the high pure rate of time preference is lower under openness than under autarky, while in the country with the low pure rate of time preference it is higher. 6. The stationary utility level of the country with the high pure rate of time preference is always higher under openness than under autarky. The effect of openness on the stationary utility level of the low pure rate of time preference country is ambiguous. If it is higher, openness can be said to constitute a potentially pareto-superior regime for the low pure rate of time preference country. Because of the short-run welfare l~~s it incurs after international economic integration, the open economy is not paretosuperior to the closed economy for the high pure rate of time preference country.

Ageing, Pension Reform and Capital Flows: A Multi‐Country Simulation Model

“…Overlapping-generations models have also been used to analyse international capital flows since the seminal contribution by Buiter (1981). More recently, several authors developed large-scale multi-country OLG models to study the effects of population ageing and pension reform on international capital flows.…”

Government Debt, Capital Accumulation, and the Terms of Trade in a Model of Interdependent Economies

“…If domestic and foreign consumers have different rates of time preference (which amounts to assuming different tastes for each group), discounting would matter. See Buiter [1981]. and where 6 = [(I + r,+I)o(l + r:+l)l-or--l is a weighted average of future domestic and foreign real interest rates.…”

Capital Flight, North‐South Lending, and Stages of Economic Development

“…The fact that 18 The analysis on this part is available from authors on request. 19 Buiter (1981) constructs a two-country overlapping-generation economy in which time preference differs across countries. He shows that young agents of one country who are born at the instant of integration are strictly worse off because, the capital market integration implies a smaller interest rate than under autarky given the predetermined wage income.…”

“…First, while they assume indivisibility in the production technology, our model does not require any kind of indivisibility in production for the derivation of multiple steady states. Second, we use a different infor-8 Buiter (1981) and Galor (1986) study an international factor mobility in the two-country version of the Diamond (1965) model when there is the difference in the subjective discount rate between countries. 9 Recent empirical work underscores the importance of law enforcement in the determination of economic performances.…”