The role of time preferences in explaining the long-term pattern of international trade

Globalization is accompanied by increasing current account imbalances. They can undermine the positive impacts of increasing international cooperation and trade on economic growth. By applying an economic growth model that requests for long-term compensation of short-term current account deficits, we derive patterns of international trade. Model output, however, is challenged by empirical data which is related to the Lucas-Paradox. This paper demonstrates how, based on the assumption of differentiated time preferences, model results and empirical data are reconciled with each other. The method presented here yields an indirect estimate of the rates of time preference across regions. Our results suggest that the time preference rate is low in emerging Asian countries, while the USA and Europe are characterized by above world-average rates. Based on the applied model that differentiates between trade in energy resources and a composite good, simulated trade patterns of these three world regions significantly differ from each other and also from trade patterns that occur in resource exporting countries. JEL classification: F11, F21, E21, D90, O41 keywords: global analysis, international trade, time preference, economic growth model, Lucas Paradox, current account imbalance ∗PIK Potsdam Institute for Climate Impact Research, P.O. Box 60 12 03, D-14412 Potsdam, Germany, Tel. ++49/331/288-2556, e-mail: [email protected]