International Macroeconomic and finance

5. Intertemporal Approach to the Current Account The intertemporal approach to the current account, as illustrated in the simple two-period model of a small open economy, involves the following optimisation problem of the representative agent: max U = max u(c ) + Bu(c2 ) CIC2 C1.C2 subject to the present-value intertemporal budget constraint: where ci is consumption and yi is the endowment of a perishable good, with the subscript i - 1, 2 referring to the time period; U denotes lifetime utility, u(c1) and u(c2) being the instantaneous utilities in each of the two periods; and the constants 0