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Abstract
The intertemporal approach views the current-account balance as the outcome of forwardlooking
dynamic saving and investment decisions. This paper, a chapter in the forthcoming
third volume of the Handbook of International Economics, surveys the theory and empirical
work on the intertemporal approach as it has developed since the early 1980s. After
reviewing the basic one-good, representative-consumer model, the paper considers a series of
extended models incorporating relative prices, complex demographic structures, consumer
durables, asset-market incompleteness, and asymmetric information. We also present a
variety of empirical evidence illustrating the usefulness of the intertemporal approach, and
argue that intertemporal models provide a consistent and coherent foundation for openeconomy
policy analysis. As such, the intertemporal approach should supplant the expanded
versions of the Mundell-Fleming IS-LM model that currently furnish the dominant paradigm
used by central banks, finance ministries, and international economic agencies.