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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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  9. Ben S. Bernanke, 1982. "Adjustment Costs, Durables, and Aggregate Consumption," NBER Working Papers 1038, National Bureau of Economic Research, Inc.
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  11. Kollmann, R., 1992. "Incomplete Asset Markets and International Business Cycles," Cahiers de recherche 9231, Universite de Montreal, Departement de sciences economiques.
  12. Rodriguez, Alvaro, 1993. "Precautionary saving and the Laursen-Metzler effect," Journal of International Money and Finance, Elsevier, vol. 12(3), pages 332-343, June.
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  15. 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.
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  18. Steinar Ekern & Robert Wilson, 1974. "On the Theory of the Firm in an Economy with Incomplete Markets," Bell Journal of Economics, The RAND Corporation, vol. 5(1), pages 171-180, Spring.
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  23. Stulz, Rene M., 1988. "Capital mobility and the current account," Journal of International Money and Finance, Elsevier, vol. 7(2), pages 167-180, June.
  24. Murphy, Robert G., 1986. "Productivity shocks, non-traded goods and optimal capital accumulation," European Economic Review, Elsevier, vol. 30(5), pages 1081-1095, October.
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  26. Otto, Glenn, 1992. "Testing a present-value model of the current account: Evidence from US and Canadian time series," Journal of International Money and Finance, Elsevier, vol. 11(5), pages 414-430, October.
  27. Leiderman, Leonardo & Razin, Assaf, 1991. "Determinants of external imbalances: The role of taxes, government spending, and productivity," Journal of the Japanese and International Economies, Elsevier, vol. 5(4), pages 421-450, December.
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  29. Weil, Philippe, 1989. "Overlapping families of infinitely-lived agents," Journal of Public Economics, Elsevier, vol. 38(2), pages 183-198, March.
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