The Current Account in the Macroeconomic Adjustment Process

Abstract

Macroeconomic adjustments to changes in the economic environment are to a large extent conditioned by the intertemporal choices of economic agents. When agents face an intertemporal budget constraint, a decision to alter current indebtedness implies changes in future consumption possibilities and will be based on expectations of the entire future path of key variables and not only current variables. A formal model to show how today’s current account is a function of both current and future economic variables is presented. The determination of the current account under classical assumptions of market clearing and continuous full employment is emphasized.

I would like to thank Michael Bruno for his many helpful comments on this version, and Paul Krugman, Torsten Persson and Lars Svensson for earlier comments.