Working Paper: NBER ID: w0792
Authors: Rudiger Dornbusch
Abstract: The paper sets out an overlapping generations model in an open economy context. In the absence of productive capital a real consol is the vehicle for intertemporal consumption smoothing. The presence of a long term asset implies that the anticipated future path of the economy, through the term structure of interest, affects current generations. The model is applied to issues in the closed and open economy. These include the effects of debt issue on asset prices and welfare, the effect of present or anticipated future income growth, permanent or transitory. In the open economy context we investigate the welfare and current account effects of income changes on debt issue. The role of international differences in risk aversion is studied.
Keywords: intertemporal economics; current account; public debt; risk aversion; asset prices
JEL Codes: F21; E21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| debt issuance (H63) | current account deterioration (F32) |
| debt issuance (H63) | steady-state welfare reduction (D69) |
| permanent income growth (O49) | welfare increase (I38) |
| permanent income growth (O49) | trade balance deterioration (F14) |
| transitory income rise (F29) | current account effects (same as permanent change) (F32) |
| risk aversion coefficients (D81) | saving behaviors and current accounts (D14) |