Setting up a development install/environment

The problem that I have with trying to set up a development environment is that WP stores the site’s URL and directory location in the database. So if you have your development version set up at a different URL (say at localhost or dev.yoursite.com) the linking between pages will not work. One solution that I came up with is to use 2 separate databases. This way the settings for the 2 sites can be stored in the database that corresponds to it. I don’t like this method and wish there was an easier way. Does anyone have a solution to the issue of WP storing site-specific settings in the database? Do you sync 2 databases or have you found a solution to use 1 database for both your production site and dev site?