Analysis of the Dynamics of Azerbaijan’s Balance of Payments Using Error Correction Model

Purpose of the study. Analysis of changes in the dynamics and structure of the balance of payments to develop preventive anti-crisis measures is one of the important and most difficult tasks of regulating the economy at the state level. The growing number of scientific papers devoted to modeling dynamics, studying the relationship of the balance of payments with various endogenous and exogenous factors indicates the importance and growing interest in this topic.

Materials and methods. The original time series are nonstationary. When moving to time series with differences, information corresponding only to short-term changes is stored in these series. And all other information covering long-term changes in dynamics is lost when moving to differences. The situation that has arisen requires a correct approach to the process of modeling the time series under consideration. The observation period of the study covers annual data from 1995 to 2023. To solve the problem and to provide a characteristic description of the dynamics of the development of the balance of payments, the paper first carried out an economic analysis of the dynamics of the balance of payments for its individual articles, from 2012 to 2021, in particular for 2020-2021. Subsequent steps for advanced econometric analysis of time series were devoted to the determination of stationarity, the transition to differences, and the construction of vector error correction models. When performing the cointegration test, its combination with the stationarity test was revealed. All necessary tests were performed and analyzed. Critical values for these statistics were obtained and analyzed.

Results. This article develops a vector error correction model that allows the analysis and modeling of more than two – time statistical series in a specified time period. VECM limits the dynamics of endogenous factors and directs them to a cointegration relationship. The paper examines the relationship between the current account of the balance of payments of Azerbaijan and world prices for West Texas Intermediate and Brent oil.

Conclusion. Using the constructed VECM, it is possible to measure deviations from equilibrium and the rate of its restoration. The very slow recovery after the disruption from the shock reactions of changes in world oil prices allows us to conclude that there is a stable, longterm, equilibrium relationship between the time series under study.

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