Handbook of Safeguarding Global Financial Stability

Chapter 12

Intertemporal Approach to the Current Account

P.R. Bergin

University of California at Davis, Davis, CA, USA

Outline

Introduction

Intertemporal Theories

A Simple Theory with Two Periods and No Uncertainty

A Basic Stochastic Case with an Infinite Horizon

More General Theoretical Cases

Empirical Relevance of the Theory and its Implications

Present-Value Tests

Implications for Current Account Experience

Conclusion

Glossary

Further Reading

A country’s current account balance with the rest of the world can be understood as a reflection of the optimal saving decisions of its residents. This intertemporal theory posits that the current account is driven by the desire to smooth consumption over time in response to random shocks to income. The ...