Current accounts in the long run and the intertemporal approach: a panel data investigation

This paper is a theory-based study of the long-run determinants of the current account (CA). For many OECD economies after WWII, 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