PRECAUTIONARY SAVING AND PERSISTENT CURRENT ACCOUNT IMBALANCE

The neoclassical representative agent model attributes persistent curr ent account imbalance to differences in time preference rates. Exogeno us time preference yields corner solutions in which one country owns t he world's wealth. With endogenous time preference, corners are avoide d, but at the cost of the intuitively unappealing assumption that weal thier agents are more impatient. This paper shows that an agent, with constant relative risk aversion utility, subject to stochastic income shocks, has a risk-adjusted rate of time preference which is increasin g in wealth. Precautionary saving falls as wealth rises, allowing avoi dance of corner solutions with an intuitively appealing assumption abo ut behavior.