The Harberger-Laursen-Metzler effect with with Marshallian preferences

The effects of a terms of trade deterioration on the current account are studied when the representative agent has Marshallian preferences, with which the rate of time preference is a decreasing function of savings. A terms of trade deterioration reduces the permanent income of the representative agent. With Marshallian preferences, savings fall and the country runs a current account deficit. The numerical evaluations of the model suggest that with standard functional forms and reasonable parameter values the Harberger-Laursen-Metzler effect is recovered in an infinite horizon model with an endogenous rate of time preference.