We recently introduced the dynamical cluster approximation (DCA), a techniq
ue that includes short-ranged dynamical correlations in addition to the loc
al dynamics of the dynamical mean-field approximation while preserving caus
ality. The technique is based on an iterative self-consistency scheme on a
finite-size periodic cluster. The dynamical mean-field approximation (exact
result) is obtained by taking the cluster to a single site (the thermodyna
mic limit). Here, we provide details of our method, explicitly show that it
is causal, systematic, Phi derivable, and that it becomes conserving as th
e cluster size increases. We demonstrate the DCA by applying it to a quantu
m Monte Carlo and exact enumeration study of the two-dimensional Falicov-Ki
mball model. The resulting spectral functions preserve causality, and the s
pectra and the charge-density-wave transition temperature converge quickly
and systematically to the thermodynamic limit as the cluster size increases
.