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The intertemporal approach to the current account

In: Handbook of International Economics

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  • Obstfeld, Maurice
  • Rogoff, Kenneth

Abstract

The intertemporal approach views the current-account balance as the outcome of forward-looking dynamic saving and investment decisions. This paper, a chapter in the forthcoming third volume of the Handbook of International Economics, surveys the theory and empirical work on the intertemporal approach as it has developed since the early 1980s. After reviewing the basic one-good, representative- consumer model, the paper considers a series of extended models incorporating relative prices, complex demographic structures, consumer durables, asset-market incompleteness, and asymmetric information. We also present a variety of empirical evidence illustrating the usefulness of the intertemporal approach, and argue that intertemporal models provide a consistent and coherent foundation for open-economy policy analysis. As such, the intertemporal approach should supplant the expanded versions of the Mundell-Fleming IS-LM model that currently furnish the dominant paradigm used by central banks, finance ministries, and international economic agencies.

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This chapter was published in:

  • G. M. Grossman & K. Rogoff (ed.), 1995. "Handbook of International Economics," Handbook of International Economics, Elsevier, edition 1, volume 3, number 3, 00.
    This item is provided by Elsevier in its series Handbook of International Economics with number 3-34.

    Handle: RePEc:eee:intchp:3-34

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    Web page: http://www.elsevier.com/wps/find/bookseriesdescription.cws_home/BS_HE/description

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    1. Murphy, Robert G., 1986. "Productivity shocks, non-traded goods and optimal capital accumulation," European Economic Review, Elsevier, vol. 30(5), pages 1081-1095, October.
    2. Alan C. Stockman, 1989. "Fiscal Policies and International Financial Markets," NBER Working Papers 1961, National Bureau of Economic Research, Inc.
    3. Maurice Obstfeld & Alan C. Stockman, 1985. "Exchange-Rate Dynamics," NBER Working Papers 1230, National Bureau of Economic Research, Inc.
    4. Kollmann, R., 1992. "Incomplete Asset Markets and International Business Cycles," Cahiers de recherche 9231, Centre interuniversitaire de recherche en ├ęconomie quantitative, CIREQ.
    5. Alan C. Stockman, 1989. "Sectoral and National Aggregate Disturbances to Industrial Output in Seven European Countries," NBER Working Papers 2313, National Bureau of Economic Research, Inc.
    6. Alan C. Stockman & Linda L. Tesar, 1991. "Tastes and technology in a two-country model of the business cycle: explaining international co-movements," Working Paper 9019, Federal Reserve Bank of Cleveland.
    7. Deaton, Angus, 1992. "Understanding Consumption," OUP Catalogue, Oxford University Press, number 9780198288244.
    8. Rodriguez, Alvaro, 1993. "Precautionary saving and the Laursen-Metzler effect," Journal of International Money and Finance, Elsevier, vol. 12(3), pages 332-343, June.
    9. David Johnson, 1986. "Consumption, Permanent Income, and Financial Wealth in Canada: Empirical Evidence on the Intertemporal Approach to the Current Account," Canadian Journal of Economics, Canadian Economics Association, vol. 19(2), pages 189-206, May.
    10. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, January.
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