Durable Goods,Time Preference and The Dynamics of the Current Account

A small open economy model with an endogenous time preference is used to study the current account dynamics when consumption exhibits durability. There is a unique level of instantaneous utility and stock of durables that must be maintained in the steady state. A terms of trade deterioration requires a net asset accumulation and a fall in consumption expenditures along the adjustment path. Nevertheless, the fall in consumption expenditures leads to a fall in the stock of durables, which has to be corrected somewhere along the adjustment path, and which may lead to a non-monotonic adjustment of the current account (J-curve).

Arman MansoorianEmail: