Chapter 34 The intertemporal approach to the current account

A country's current-account balance over any time period is the increase in Residents' claims on foreign incomes or outputs, less the increase in similar foreign-owned claims on home income or output. Thus, in theory, the current account includes not only exports less imports (broadly defined to include all the income on and payouts on cross-border assetsdividends, interest payments, insurance premia and payments, etc.), but also net capital gains on existing foreign assets. F The intertemporal approach views the current-account balance as the outcome of forward-looking dynamic saving and investment decisions. This chapter surveys the theory and empirical work on the intertemporal approach to the current account as it has developed since the early 1980s. Recently, some researchers have studied dynamic stochastic international models with complete ArrowDebreu forward markets for uncertain consumption. This particular offshoot of the intertemporal approach is the complete-markets model. The intertemporal approach to current-account analysis extends the absorption approach through its recognition that private saving and investment decisions, and sometimes even government decisions, result from forward-looking calculations based on the expectations of future productivity growth, government spending demands, real interest rates, and so on.