Abstract
Recent studies have challenged the standard version of the intertemporal approach to the current account. According to the new rule, the impact of transitory income shocks on the current account is equal to the saving generated by the shock multiplied by the country's share of foreign assets in total assets. The new rule is well supported by the empirical evidence. This paper proposes an straigthforward extension of the new rule abandoning the small open economy assumption. According the extended new rule, the response of transitory income shocks on the current account is equal to the new rule plus an additional term. This term captures the saving generated by the shock in the foreign economy multiplied by the foreign country's share of domestic capital in foreign total assets. The extended new rule provides a good account for the empirical evidence on current accounts for 19 OECD countries in the period 1970-2004, both in the short run and the long run, even better than the new rule.
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