Reading Capital Flows Consumption Smoothing

Reading Capital Flows Consumption Smoothing Consumption Smoothing Basic Framework Consider a two-period small open economy (SOE) model, with exogenous world interest rate r Let the discount factor be  = 1 1+ . Household receives endowments/incomes Y1 & Y2 in periods 1 & 2. Its (lifetime utility) maximisation problem is: maxU = u(C1) + u(C2) w:r :t: C1 & C2 (1) subject to following present value budget constraint: C1 + C2 1 + r = Y1 + Y2 1 + r (2) 4 / 10