Time Preference and Trade Imbalance

Abstract

This paper presents a unified theory of trade and investment in a world where the rate of time preference varies between countries. In the framework proposed by Buiter (1981), we can analyze a situation wherein two countries have different rates of discount. Here, the value of the debt to income does not converge to zero but remains constant even in the long run. Furthermore, we show that the existence of less-capital-intensive nontradables promotes capital movements: since a more patient country incompletely specializes in less-capital-intensive nontradables, capital must flow out of it. © 2011 Blackwell Publishing Ltd.