Whither the Balance of Payments?

This article sets out the analytical framework of the 'new' approach to the balance of payments under the conditions of 'international financial laissez faire' characterised by financial deregulation, floating exchange rates, and high international capital mobility. It is argued that much of the reasoning underlying the new approach derives from the modus operandi of regional payments systems. The fundamental differences between the benchmark model of regional financing and the current international financial laissez faire are explored, and the extent to which the presence of exchange risk may interfere with the 'optimal' debt/borrowing processes posited by the new approach is discussed. The possibility of a transfer problem arising from Australia's rapid accumulation of short-term foreign debt is considered.
While developments in international banking, together with the liberalisation and globalisation of world securities markets, have considerably narrowed the differences between the new global financial environment and regional payments systems, the conclusion of the article is that there are substantial externalities in the international case which are intrinsic to the debt/borrowing process and which are likely to remain a source of continued policy concern.