Capital accumulation and the current account in a two-country model

This paper examines the joint determination of international debt and capital accumulation in a two-country model. National rates of time preference are endogenous, adjusting along an optimal path to come into equality with one another in the steady state. The characteristics of short-run current account dynamics are crucially linked to world capital accumulation and to a country's long-run net external asset position. Steady-state creditor countries tend to have current account surpluses during episodes of world output growth and vice versa for debtor countries. This gives rise to possible non-monotonic adjustment in the current account and consumption.