Intertemporal dependence, impatience, and dynamics

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Abstract

This paper develops simple geometric methods for analyzing consumer behavior under recursive but intertemporally dependent tastes. Since the preferences studied need not be time-additive, they allow the marginal utility of consumption on a given date to vary with consumption on other dates. Intertemporal dependence is induced by the presence of a variable individual rate of time preference. The optimal consumption responses to transitory and anticipated changes in incomes and interest rates are easily derived and are similar in many respects to the responses implied by the standard, constant time-preference model. Intuitive explanations of the first-order conditions describing optimal paths are provided.

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    This paper grew out of conversations with José Saúl Lizondo and Peter Montiel. It was written and partially researched while I was a visiting scholar in the research department of the International Monetary Fund, which I thank for its hospitality. Larry Epstein, Philippe Weil, and an anonymous referee made helpful comments, but the responsibility for any errors is mine. Research support from the National Science Foundation is acknowledged with thanks.

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