Harberger-Laursen-Metzler Effect with Modified Becker-Mulligan Preference by Dynamic Optimization

Deng-Shan Wang,Zeng-Gang Guo,Miao Jin

doi:10.1155/2016/4190294

Abstract

We investigate the effects of terms-of-trade shocks on the spending and current account where households with the modified Becker-Mulligan endogenous time preference maximize their utility over an infinite planning period. Our results show that, with the modified Becker-Mulligan preference, the effect of the deterioration in terms of trade on the current account depends on people’s characters. However, with the second preference we have considered, the deterioration in terms of trade will result in a current account deficit, which is the same as Obstfeld (1982), where households with Uzawa endogenous time preference are considered; deterioration in terms of trade leads to a decline in the current account. These theoretical results are consistent with the empirical evidence by numerical simulations.

Highlights

There are many fluctuations in small open economies, since they tend to be disturbed by external shocks through international trade
We investigate the effects of terms-of-trade shocks on the spending and current account where households with the modified Becker-Mulligan endogenous time preference maximize their utility over an infinite planning period
With the second preference we have considered, the deterioration in terms of trade will result in a current account deficit, which is the same as Obstfeld (1982), where households with Uzawa endogenous time preference are considered; deterioration in terms of trade leads to a decline in the current account

Summary

Introduction

There are many fluctuations in small open economies, since they tend to be disturbed by external shocks through international trade. It is found that an economy specialized in production (means that the country is small and open) must experience a fall in aggregate spending and a current surplus as a result of an unanticipated, permanent worsening in its terms of trade He provides a setting in which the current account deficit predicted by Harberger [1] and Laursen and Metzler [2] fails to materialize, where an endogenous Uzawa time preference is used. Gong [12] investigates the effects of monetary growth in an infinitely lived, representative agent model with B-M preference He finds that an increase in the inflation rate reduces the resources spent on imagining the future, which increases the rate of time preference and decreases the steady-state value of capital stock.

The Model

The H-L-M Effect with Modified B-M Preference

Empirical Evidence by Numerical Simulations

Conclusion