Balance of payments cycles

In this study, I investigate and analyze debt-credit relations among major countries within the framework of the stage hypothesis. This analysis pays particular attention to the interaction between stage movements and nation\u27s indebtedness position. For this purpose, both a theoretical model and empirical evidence will be presented. Chapter one describes the dynamic nature of the stages in the balance of payments. First, dynamic models introduced by Neher (1970), Fischer and Frenkel (1974) and Onitsuka (1974) are reexamined and critically reviewed. Their small open economy models integrate a dynamic theory of investment into modern growth theory and provide evidence for the stage hypothesis. In contrast, the dynamic optimization model of Bazdarich (1978) reaches different conclusions. Bazdarich\u27s model is based on the infinite time horizon assumption, he thus argues that stage tendencies are not optimal. The model developed in this chapter stems from two major changes made in Bazdarich\u27s model. First, utilization of a finite horizon model enables the investigation of three different consumption paths when the time preference rate and the interest rate are not equal. Secondly, introducing an installation cost of investment affects the nature of capital formation. The combined effect of the above modifications allows for a model that describes full stage movement in the balance of payments when the interest rate is higher than the time preference rate. Chapter two studies recent trends in current accounts imbalances from the perspective of the balance of payments stages hypothesis. It investigates and analyzes the systems that would lead to changes in a nation\u27s debt position along with stage movements. To this end, real GDP is employed as an index of a nation\u27s economic development, and the relationship between changes in the level of income and the corresponding changes in stages in the balance of payments is estimated. This chapter also performs OLS regressions and probit tests; the results suggest a dissenting view of the role of income level as a major determinant of stages. Chapter three introduces the life cycle hypothesis of saving in open economies. It first develops a model and then examines the significance of the demographic variables for aggregate savings by providing cross country empirical evidence. This study contributes significantly to our understanding of balance of payments cycles because it is the first to analyze the effect of the demographic structure on external balances. In general, empirical tests suggest that population structure plays an important role in determining a nation\u27s indebtedness position. This study\u27s application of the four-generation life cycle model provides a basis for long term prediction of the balance of payments accounts. The validity of the above analysis is heavily dependent on the age structure of the populations