Abstract

This paper analyzes a model of overlapping generations in which there are two currencies. There are two agents born in each period, and these agents have completely heterogeneous preferences and endowments. The paper shows that there are monetary equilibria in which one country can sustain a trade deficit whose present value is arbitrarily close to that of its trading partner's entire stream of resources. Hence, there may be no limit to the present value of a country's trade deficit, even if the equilibrium for the world economy satisfies an intertemporal efficiency criterion.

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Economics

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URL: http://digitalcommons.calpoly.edu/econ_fac/68