| Abstract: | This paper is a theory‐based study of the long‐run determinants of the current account (CA). For many OECD economies after the Second World War, there has been more long‐run variation in the CA data than is emphasised by a ‘Permanent Income’ version of the intertemporal approach that is based on consumption‐smoothing and that allows only transitory CA imbalances. A theoretical model of the CA is developed, based on the ‘broader’ variant of the intertemporal approach that stresses the long‐term component of the CA. We find that some key theoretical predictions hold, while others fail, validating the approach but also pointing to its limitations. |
