Impact of Time Preference on Economic Growth

Economic development, social welfare and improvement of living standards are main issues in economic planning, which requires higher economic growth as precondition. Time preference plays an important role in the health of the economy, given its contribution to capital formation, economic growth, and interest rate. The existence of the time preference reflects social impatience with the present value of consumption relative to future consumption. Therefore, if present generation attributes high weigh to itself in allocating resources between current and future generations, the available resources will decrease, and economic growth will stabilize in a lower rate. According to the microeconomic theoretical foundations, and using mathematical logic, this study provides a logical reasoning in analyzing macroeconomic phenomena. This research aims to illustrate how to time preference impacts economic growth. Using MATLAB software and calibrating the model for Iran’s economy, the optimal paths of consumption, savings, investment and economic growth are extracted with and without commitment. The results show that the optimal paths of capital stock, consumption and economic growth are in higher levels for full commitment than no- commitment, and these converge at the end-points. The final section will examine how to change in time preference and its impact on the optimal paths of variables. Running various scenarios show that an increase in the rate of time preference reduces economic welfare, the effective rate of time preference and economic growth.