EXTERNAL DEBT, TIME PREFERENCE, AND NONTRADED GOODS IN A 2-SECTOR DYNAMIC-MODEL OF CONSUMPTION

A number of studies have indicated that one of the consequences of a development process is a rise in the consumers' subjective time preference rate (discount rate). This study first shows that many of the adverse economic observations in developing countries can emerge from a rise in the discount rate. It then demonstrates that the extent of such adverse effects is related to relative shares of the tradable and nontradable sectors in aggregate consumption. A result is that the aggregate dissaving generated by a rise in the discount rate is smaller when the economy's nontradable sector is relatively larger. The results add new dimensions to the allocation policies applied by international lending institutions in developing economies.