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International Parity Conditions in a Two-Country OLG Model Under Free Trade

In: Growth and International Trade

Author

Listed:
  • Karl Farmer

    (University of Graz)

  • Matthias Schelnast

    (University of Graz)

Abstract

This chapter extends the basic OLG growth model of Chap. 2 into a two-country OLG model with free trade of two commodities and government bonds but internationally immobile labor and capital. In the original version of the model set-up, young households in both countries hold national fiat money for transaction purposes. The intertemporal choice problem of young households is split into two parts: first, the determination of utility-maximizing asset holding and consumption expenditures and second, the expenditure minimizing allocation of the consumption basket on the two commodities produced domestically and abroad. From the latter, the purchasing power parity in its absolute and relative version is derived, while from the former the uncovered interest parity condition is obtained. Finally, the basic neoclassical (Heckscher–Ohlin) model of inter-sectoral trade is presented as a special case of the general two-country model.

Suggested Citation

  • Karl Farmer & Matthias Schelnast, 2021. "International Parity Conditions in a Two-Country OLG Model Under Free Trade," Springer Texts in Business and Economics, in: Growth and International Trade, edition 2, chapter 11, pages 259-281, Springer.
    • Handle: RePEc:spr:sptchp:978-3-662-62943-7_11
    DOI: 10.1007/978-3-662-62943-7_11
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