What Determines the Current Account: Intratemporal versus Intertemporal Factors

This paper adds to the discussion on the determinants of the current account balance. In particular, we construct a large balanced panel of data for 101 countries and 15 years covering observations for the current account and 18 explanatory variables. Next, we apply static and dynamic Bayesian Model Averaging techniques to verify whether intratemporal (i.e. relative demand and real exchange rates) or intertemporal factors (i.e. stage of development, fiscal balance, demographics) are crucial to understand current account developments. Our results indicate that the latter are key drivers of the external balance, which provides support for the intertemporal model of the current account.