Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/92730
Authors: 
Gombi, Ichiro
Ikeda, Shinsuke
Year of Publication: 
2001
Series/Report no.: 
ISER Discussion Paper, Institute of Social and Economic Research, Osaka University 551
Abstract: 
By using a two-country model with habit-forming consumers, this paper shows that the transfer paradox can take place in the free-trade, dynamically-stable world economy. When the debtor is more habituated to consumption than the creditor, an income transfer from the creditor to the debtor raises the interest rate in transition through changes in time preference. With sufficiently low elasticities of intertemporal substitution and/or sufficiently large stock of the creditor's assets, the intertemporal terms of trade effect immiserizes the recipient and enriches the donor. Although the transfer paradox occurs only when the international bond market is 'unstable' with respect to an ad hoc Walrasian adjustment process, the equilibrium dynamics are stable in the usual sense: given that the economy is always in the rational expectation equilibrium, the transfer paradox generically occurs.
Subjects: 
habit
transfer paradox
two-country model
stability
JEL: 
F00
D90
Document Type: 
Working Paper

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