International Lending and Borrowing in a Stochastic Sequence Equilibrium

Richard H. Clarida

NBER Working Paper No. 1944
Issued in June 1986
NBER Program(s):   ITI   IFM

This paper is a theoretical investigation of international lending and

borrowing in the context of a general equilibrium model in which national

productivities are subject to random fluctuations and rates of time

preference differ among countries. International capital flows arise from

the efforts of risk-averse households situated in different countries to

self-insure against random productivity fluctuations. We establish the

existence of a rational expectations equilibrium in which the world

interest rate is constant and strictly less than the rate of time

preference of the least impatient countries. The rate of time preference,

solvency restrictions on borrowing, and balanced-budget fiscal policies are

rigorously analyzed.

(459 K)

(197 K)

Published: International Economic Review, Vol. 31 (August 1990): 543-558.

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