Working Paper: NBER ID: w4893
Authors: Maurice Obstfeld; Kenneth Rogoff
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.
Keywords: current account; intertemporal approach; dynamic saving; investment decisions
JEL Codes: F32; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| national saving (D14) | current account balance (F32) |
| domestic investment rates (F21) | current account balance (F32) |
| increased saving (D14) | improved current account balance (F32) |
| external shocks (F69) | expectations and investment decisions (G11) |
| expectations (D84) | current account balance (F32) |
| macroeconomic determinants (E00) | saving and investment decisions (G11) |
| saving and investment decisions (G11) | current account balance (F32) |