Macroeconomics, 2nd Edition by Pearson

13.1

Intertemporal Accounting and the

Current Account Determination

In the last 15 years, a large literature on the dynamic optimizing (or inter-

temporal) approach to the current account has been developed. These mod-

els have emphasized the effects of real factors, such as productivity, terms of

trade, government spending, and taxes on the current account balance. These

operate through intertemporal substitution in consumption, production, and

investment. These models were a response to a major shortcoming in the

M

UNDELL

–F

LEMING

approach to an open economy.

In the Mundell–Fleming approach under a flexible exchange rate, a cur- ...