A Survey Of Competing Theoretical Approaches To Current Account Determination

Recent theoretical approaches to current account determination suggest that the appropriate measure of external balance depends on the country's exposition to international asset trade and the structure of national portfolio. Although valuation changes may reach significant fractions of GDP, the external current account still matters, even for the advanced economies that maintain strong links with the international capital market. The intertemporal (or dynamic-optimizing) model has kept its reputation of workhorse model in new open economy macroeconomics and through its extended versions has preserved its validity at the beginning of the new century, as well. This does not mean that the other approaches have been declared outmoded. The Mundell-Fleming model, for instance, is still a legitimate tool for policy analysis in many countries. There are calls for revisiting the portfolio balance model on the grounds of increasing international asset diversification, as well. Apparently, there is a growing interest in this particular field of international macroeconomics aimed at re-assessing the importance of the concepts of external balance, adjustment and sustainability.