Simulating Optimal Consumption Paths in a Small Open Economy with Uzawa Preferences

This paper compares a form of endogenous preferences introduced by Uzawa with additive preferences by simulating the optimal consumption response for a small open economy to permanent and temporary shocks to the world rate of interest. Uzawa preferences, by endogenising the rate of time preference, are more general than additive preferences. Furthermore, in simulations of permanent changes to the rate of interest, additive preferences suffer from the apparent disadvantage of requiring the rate of time preference to be changed exogenously.