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The Intertemporal Approach to the Current Account

  • Maurice Obstfeld
  • Kenneth Rogoff

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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4893.

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Date of creation: Oct 1994
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Publication status: published as Gene Grossman and Kenneth Rogoff, eds. Handbook of International Economicsvol 3, Amsterdam: North-Holland, Elsevior Press, 1995.
Handle: RePEc:nbr:nberwo:4893
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