Table of Contents
Economics Research International
Volume 2015 (2015), Article ID 836045, 10 pages
Research Article

Nonexistence of Harberger-Laursen-Metzler Effect with Endogenous Time Preference in an Imperfect Capital Market

1School of Science, Beijing Information Science and Technology University, Beijing 100192, China
2Guanghua School of Management, Peking University, Beijing 100871, China
3CEMA, Central University of Finance and Economics, Beijing 100081, China

Received 29 April 2015; Revised 22 June 2015; Accepted 23 June 2015

Academic Editor: Udo Broll

Copyright © 2015 Deng-Shan Wang and Miao Jin. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.


This paper investigates the spending and current-account effects of a permanent terms-of-trade change in a dynamic small open economy facing an imperfect world capital market, where the households’ subjective discount rate is a function of savings. Under the assumption that the bond holdings are measured in terms of home goods, it is shown that when the discount rate is a decreasing function of savings, there does not necessarily exist a stable state; however, when the discount rate is an increasing function of savings, a saddle-path stable steady state comes into existence and the Harberger-Laursen-Metzler effect does not exist unambiguously; that is, an unanticipated permanent terms-of-trade deterioration leads to a cut in aggregate expenditure and a current-account surplus. The short-run effects obtained by the technique by Judd (1985, 1987) and Zou (1997) are consistent with the results from the long-run analysis and diagrammatic analysis.