International Lending and Borrowing in a Stochastic Sequence Equilibrium

This paper is a theoretical investigation of international lending and
borrowing in the context of a general equilibrium model in which national
productivities are subject to random fluctuations and rates of time
preference differ among countries. International capital flows arise from
the efforts of risk-averse households situated in different countries to
self-insure against random productivity fluctuations. We establish the
existence of a rational expectations equilibrium in which the world
interest rate is constant and strictly less than the rate of time
preference of the least impatient countries. The rate of time preference,
solvency restrictions on borrowing, and balanced-budget fiscal policies are
rigorously analyzed.