EFFECTS OF GOVERNMENT SPENDING ON THE CURRENT ACCOUNT WITH ENDOGENOUSTIME PREFERENCE

This paper extends a previous model to set up a small open economy wit h perfect capital mobility, and examines the effects of an unanticipat ed permanent rise in public spending on the optimal rates of private c onsumption and the current account, The novelty of the paper is consid eration of the relationship between private and public consumption in the household's utility function as well as endogenous rates of time p reference. It is found that the key factor determining the adjustment patterns of private consumption and the current account is the margina l utility of private consumption and of public spending, which results from endogenous recursive preferences.