- Abdessatar Ouanes, and Subhash Thakur
- Published Date:
- June 1997
This chapter draws on a number of published reviews of Poland’s experience of transformation, including Jeffrey Sachs, Poland’s Jump to the Market Economy (Cambridge, Massachusetts: MIT Press, 1993); Olivier Blanchard, Kenneth Froot, and Jeffrey Sachs, eds., “Stabilization and Transition: Poland, 1990–91,” The Transition in Eastern Europe: Country Studies, Vol. 1 (Chicago: The University of Chicago Press, 1994), and David Lipton and Jeffrey Sachs, “Creating a Market Economy in Eastern Europe: The Case of Poland,” The Brookings Papers on Economic Activity, Vol. 1 (Washington: Brookings Institution, 1990). For a general review of economic issues in transition economies, see Michael Bruno, “Stabilization and Reform in Eastern Europe,” Staff Papers, International Monetary Fund, Vol. 39 (December 1992).
These attempts at partial reform in the 1980s are parallel to the reforms attempted under perestroika in the former Soviet Union. Both efforts ended with hyperinflation, intense shortage of goods and services, growing black markets, and falling output.
See E. Borensztein and J. Ostry, “Structural and Macroeconomic Determinants of the Output Decline in Czechoslovakia and Poland,” IMF Working Paper 92/86 (Washington: International Monetary Fund, 1992). See also Guillermo A. Calvo, “Money, Exchange Rates and Output” (Cambridge, Massachusetts: MIT Press, 1996).
Indeed, the national accounts of these countries were still being compiled primarily on the basis of the central planning methodology (the Material Product System, or MPS), which did not count services but focused on the net material product.
See “Moving from Moderate to Low Inflation in Poland,” IMF Survey, February 5, 1996. For a broader coverage of this issue, see Sharmini Coorey, M. Mecagni, and Erik Offerdal, “Disinflation in Transition Economies: The Role of Relative Price Adjustments,” IMF Working Paper 96/138 (Washington: International Monetary Fund, December 1996).
For a comprehensive review of the experience of transition and the preliminary lessons of this experience, see “From Plan to Market,” World Development Report 1996 (Washington: World Bank, 1996); and the Annual Reports of the European Bank for Reconstruction and Development
This section is based on the revised SNA as described in the System of National Accounts, Commission of European Communities, International Monetary Fund, Organization for Economic Cooperation and Development, United Nations, and The World Bank, 1993. The previous version of SNA was published in 1968, United Nations, Statistical Office, A System of National Accounts, Studies in Methods, Series F, Number 2, Revision 3 (New York: United Nations, 1968). A summary of the main differences between the two versions of the SNA is shown in Appendix Table 2.10.
See Anne-Marie Guide and Marianne Schulze-Ghattas, “Purchasing Power Parity Based Weights for the World Economic Outlook,” Staff Studies for the World Economic Outlook (Washington: International Monetary Fund, December 1993).
Includes inventories of finished goods and work in progress only. Inventories of intermediate inputs are not included.
In a broader sense, any current activity that increases the economy’s ability to produce output in the future can be called investment. In this sense, education can be regarded as investment in human capital, since it enhances the ability of the labor force to produce goods and services.
There are different concepts of net exports, depending on what is included in services. A distinction is often made between factor and nonfactor services. Factor services in this context refer to income received from or paid to nonresidents for services provided by a factor of production, such as labor (wages) or capital (interest).
The identities used here hold only if the components are valued according to the SNA. For a summary of the issues involved in valuation, see the appendix to this chapter.
The operating surplus also includes any statistical discrepancies.
Called “indirect taxes less subsidies” under the previous version of the SNA. The term indirect taxes is no longer used to refer to taxes on production and consumption, because it is difficult to determine the real incidence of different kinds of taxes, making the distinction between direct and indirect taxes arbitrary (see Chapter 7, Section C, of the 1993 System of National Accounts).
Although net national disposable income (NNDI) is the aggregate that should be used for analysis of the generation of income and wealth, for practical reasons gross national disposable income (GNDI) is more widely used and is more appropriate for flow-of-funds analysis because receipts and expenditures in the macroeconomic accounts are expressed on a gross basis. Another aggregate sometimes used is gross domestic saving, defined as S minus net current transfers from abroad (TRf) and net factor income from abroad (Yf).
The external current account balance is analyzed in more detail in Chapter 4. It is defined as exports of goods and services minus imports of goods and services plus net factor income from abroad plus net current transfers from abroad.
In transition economies, because of rapid changes in production and consumption patterns and the lack of reliable price indicators, it is often preferable to derive real GDP data using volume or quantity indicators rather than using a GDP deflator to deflate GDP at current prices.
Based on Rudiger Dornbusch and Stanley Fischer, Macroeconomies (New York, NY: McGraw-Hill, 6th ed., 1994).
This section is adapted from the IMF’s World Economic Outlook(Washington: International Monetary Fund, 1994). For a more technical discussion of national accounts measurement issues, see Adriaan M. Bloem, Paul Cotterell, and Terry Gigantes, “National Accounts in Transition Economies: Distortions and Biases,” IMF Working Paper 96/130 (Washington: International Monetary Fund, 1996).
See Kent Osband, “Index Number Biases During Price Liberalization,”Staff Papers, International Monetary Fund, Vol. 39 (June 1992), pp. 287-309; and Vincent Koen, “Measuring the Transition: A User’s View on National Accounts in Russia,” IMF Working Paper 94/6 (Washington: International Monetary Fund, 1994).
Andrew Berg and Jeffrey Sachs, “Structural Adjustment and International Trade in Eastern Europe: The Case of Poland,” Economic Policy, Vol. 14 (April 1992), pp. 117-73.
Zenon Raweski, “National Income,” Results of the Polish Economic Transformation, edited by L. Zienkowski (Warsaw: Glowny Urzad Statystyczny/Polish Academy of Sciences, 1993).
Inertial inflation is inherited, very often as a result of past excess demand inflation or exogenous price shocks that have been perpetuated through contracts and wage commitments (including indexation).
This conventional wage guideline is derived using the assumption that the relative shares of wage and nonwage income in GDP remain unchanged.
See Fabrizio Coricelli and Ana Revenga, eds., “Wage Policy During the Transition to a Market Economy: Poland, 1990–91,” World Bank Discussion Paper 158 (Washington: World Bank, 1992).
For a more detailed discussion of wage controls in transition economies, see Susan Schadler, ed., and others, IMF Conditionality: Experience Under Stand-By and Extended Arrangements, IMF Occasional Paper No. 129 (Washington: International Monetary Fund, 1995), pp. 107-24. See also Simon Commander and Fabrizio Corricelli, eds., Unemployment, Restructuring, and Labor Markets in Eastern Europe and Russia (Washington: World Bank, 1995).
Details on the nature of earlier reform efforts and the events leading to the economic crisis of the late 1980s can be found in T.D. Lane, “Inflation, Stabilization and Economic Transformation in Poland: The First Year,” IMF Working Paper 91/70 (Washington: International Monetary Fund, 1991); and T.A. Wolf, “The Lessons of Limited Market-Oriented Reform,” Journal of Economic Perspectives Vol. 5 (Fall 1991), pp. 45-58.
See, for example, D. Rodrik, “Making Sense of the Soviet Trade Shock in Eastern Europe: A Framework and Some Estimates,” Eastern Europe in Transition: From Recession to Growth? Discussion Paper No. 196 (Washington: World Bank, 1993); and E. Borenzstein and J. Ostry, “Structural and Macroeconomic Determinants of the Output Decline in Czechoslovakia and Poland” (mimeograph; Washington: International Monetary Fund, 1992). See also G. Calvo and F. Coricelli, “Output Collapse in Eastern Europe: The Role of Credit,” and A. Berg, “Measurement and Mismeasurement of Economic Activity During Transition to the Market,” Eastern Europe in Transition: From Recession to Growth? Discussion Paper No. 196 (Washington: World Bank, 1993).
The government continued to administer prices for electricity, gas, central heating, basic medicines, and rent in locally administered housing units, as well as television fees. The prices of some other goods, such as engine fuel, beer, wine, and cigarettes, were directly influenced by excises.
For a detailed discussion of the sectoral aspects of inflation in Poland, see Poland—Background Paper, IMF Staff Country Report No. 96/19 (Washington: International Monetary Fund, 1996). See also Liam P. Ebrill and others, Poland: The Path to a Market Economy, Occasional Paper No. 113 (Washington: International Monetary Fund, 1994).
In setting up institutions for determining wages, it is important to consider the impact of the collective bargaining structure on both macroeconomic performance and microeconomic efficiency in the labor market and the role of minimum wage laws and employment regulations. For a discussion of these issues, see Robert J. Flanagan, “Institutional Structure and Labor Market Outcomes: Western Lessons for European Countries,” IMF Working Paper 95/63 (Washington: International Monetary Fund, 1995).
See SNA, Section I, 1993.
See SNA, Chapter XIV, External Transactions Account, 1993.
The concept of residence used in the SNA is not based on nationality but rather on the notion of economic interest of the entity being considered. Thus, individuals living in a country are generally considered as residents if they have been living in the country for at least 12 months. Enterprises are considered residents where they are engaged in business, provided they have at least one productive establishment that they plan to operate for a long period of time.
For further details, see Chapter VI of the SNA, 1993.
Polish National Accounts by Institutional Sectors, GUS, April 1994 and April 1995.
Note that customs and taxes linked to imports must be added to gross output in order for the GDP to be valued consistently with the expenditure approach. However, since the taxes linked to imports have not been allocated among the sectors, the GDP depicted in the production accounts is not obtained as the sum of value added in each sector but as the sum plus the value of taxes linked to imports.
For a more complete description of the differences between the 1968 and 1993 SNA, see Annex I of the 1993 SNA.
The GFS accounting framework, which was developed to assist in the compilation of fiscal accounts, is set out in A Manual on Government Finance Statistics (Washington: International Monetary Fund, 1986).
In the states of the former Soviet Union, the governments of autonomous republics, oblasts, rayons, and gorads are considered local. The budgetary operations of the general government are recorded in state budgets that cover the central government (republican) and local budgets. For an exhaustive survey of GFS methodology issues in countries of the former Soviet Union, see Marie Montanjees, “GFS in the Countries of the Former Soviet Union: Compilation and Methodological Issues,” IMF Working Paper 95/2 (Washington: International Monetary Fund, 1995).
For an elaboration of these criteria, see GFS Manual, Chapter 1.
There are two legitimate uses of off-budget accounts: as trust funds (money held on behalf of nongovernment entities) and advance or suspense accounts (funds held against future payments).
The distortion results from the failure to record these funds above the line under “net lending” (thereby understating the extent of the deficit) and to account for the interest received and paid on these “counterpart” accounts as revenues and expenditures.
In GFS terminology, grants are unrequited, nonrepayable, noncompulsory government receipts. However, the GFS places grants in a line by themselves, separate from revenues. This treatment recognizes that the government has little control over the amount or sustainability of grants, as it does over other receipts.
Loans made by the government to a foreign government for public policy purposes are also included in net lending and thus affect the size of the deficit. The borrowing country, however, treats the loan as foreign borrowing and includes it below the line.
It is important here to distinguish between incurring debt and merely guaranteeing it. Debt liability is included in the deficit (under net lending), while guaranteed debt is not included as a government transaction even though it constitutes a contingent liability of the government.
See Ke-Young Chu and Richard Hemming, eds., Public Expenditure Handbook (Washington: International Monetary Fund, 1991).
For a discussion of the intertemporal shortcomings of the conventional deficit, see Mario I. Blejer and Adrienne Cheasty, “The Measurement of Fiscal Deficits: Analytical and Methodological Issues,” Journal of Economic Literature, Vol. 29 (December 1991).
Identifying the government saving-investment balance with the overall fiscal position assumes that the definition and coverage of government is identical in both cases. Moreover, the GFS definition of government deficit includes “net lending,” whereas the saving-investment gap of the government sector excludes it. It should also be noted that the identification of the overall fiscal position of the government with its resource balance is a broad approximation. Strictly speaking, government revenues should include only current receipts, not all revenues (Rg). In particular, it should exclude capital revenues. Generally, capital revenues are likely to be minimal. The discussion here abstracts from this distinction by treating all revenues as current revenues.
For an in-depth treatment of the subject, see Mario I. Blejer and Adrienne Cheasty, eds., How to Measure the Fiscal Deficit (Washington: International Monetary Fund, 1993).
Such conventions also differ sharply among countries, making intercountry comparisons of public investment quite difficult, even for the major industrial countries.
Generally, total interest payments are subtracted from total expenditures to calculate the primary balance. However, conceptually, only the net interest payments by the government (net of interest receipts) should be subtracted.
This discussion draws on Stanley Fischer and William Easterly, “The Economics of the Government Budget Constraint,” The World Bank Research Observer, July 1990.
In practice, reconciling fiscal and monetary data on financing gives rise to a number of problems, for several reasons, including (i) timing; (ii) the definition of government; (iii) the treatment of noncash transactions such as debt assumption by the government that is not reflected but is covered in monetary statistics; (iv) discrepancies in coverage between bank and nonbank financing; and (v) deficiencies in data.
For an influential early treatment of the subject, see Phillip Cagan, “The Monetary Dynamics of Hyperinflation” in Milton Friedman, Studies in the Quantity Theory of Money (Chicago: University of Chicago Press, 1956).
Strictly speaking, seigniorage is the difference between the value the government obtains (the face value of money) minus what it costs to create money, or the intrinsic value of money. In the case of paper money, the latter is negligible. For a further discussion of seigniorage, see Olivier Blanchard and Stanley Fischer, Lectures on Macroeconomics (Cambridge: The MIT Press, 1990); Pierre-Richard Agenor and Peter J. Montiel, Development Macroeconomics (Princeton University Press, 1996), pp. 111—26; and Oleh Havrylyshyn, Marcus Miller, and William Perraudin, “Deficits, Inflation, and Political Economy of Ukraine,” Economic Policy: A European Forum, Vol. 9, October 1994.
In many developing and transition economies, the banking system intermediates purchases of government debt. Government borrowing from the banking system that is refinanced by the central bank cannot be considered nonmonetary financing.
See Thomas Sargent and Neil Wallace, “Some Unpleasant Monetarist Arithmetic,” Federal Reserve Bank of Minneapolis Quarterly Review, Fall 1981.
Rising debt-to-GDP ratios affect real interest rates through two main channels of transmission: crowding out effects and portfolio (or risk premium) effects. For more details, see Paul R. Masson, “The Sustainability of Fiscal Deficits,” Staff Papers, International Monetary Fund, Vol. 32 (December 1985).
Clearly, policymakers are not indifferent to the long-term level at which public debt is stabilized. In many countries, official, medium-term targets are set for public debt.
It is necessary and not sufficient because solvency is consistent with many kinds of primary surpluses/seigniorage levels, all of which are not feasible.
See Willem H. Buiter, “The Arithmetic of Solvency,” Principles of Budgetary and Financial Policy (Cambridge: The MIT Press, 1990).
Please note that a primary deficit implies a pd>0 while a primary surplus implies pd<0.
See Pablo E. Guidotti and Manmohan S. Kumar, Domestic Public Debt of Externally Indebted Countries, IMF Occasional Paper No. 80 (Washington: International Monetary Fund, June 1991).
This condition is obtained from the intertemporal budget constraint by imposing the so-called transversality or terminal condition that the public debt ratio grows at a rate less than the interest rate. In other words, debt should not be serviced indefinately by borrowing (i.e., Ponzi games are assumed away by this condition). It should be noted that imposing an intertemporal budget constraint, even with a no-Ponzi game assumption, in itself does not imply that the debt ratio will stabilize, nor does it help point to the optimum level of debt-to-GDP; it simply imposes an upper bound on the growth path of the debt-to-GDP ratio.
AT is usually a data series that is not observed. It is often derived from the tax revenue series T by adjusting for the effects of changes in the tax system that occurred during the period under consideration. The resulting data series shows the revenues that would have been collected if all tax rates, exemptions, brackets, and other elements of the tax system had remained constant over the period.
For a more detailed analysis of tax policy, see Parthasarathi Shome, ed.,Tax Policy Handbook (Washington: International Monetary Fund, 1995).
For a detailed review and discussion of the “tax effort” approach, see Chelliah Raja, Hessel Baas, and Margaret Kelly, “Tax Ratios and Tax Effort in Developing Countries, 1969—71,” Staff Papers, International Monetary Fund, Vol. 22 (March 1975), pp. 187-205.
This section draws heavily on Ke-Young Chu, “Public Expenditure Policy: An Overview of Macroeconomic and Structural Issues,” Fiscal Adjustment in Eastern and Southern Africa (Washington: International Monetary Fund, 1994).
For a detailed exposition of these principles of public expenditure analysis, see Sanjay Pradhan, Evaluating Broad Allocations of Public Spending: A Methodological and Data Framework for Public Expenditure Reviews (Washington: World Bank, 1995).
In addition, interest payments and transfers play an important role.
This section is adapted from Gerd Schwartz and Benedict Clements, “Note on Subsidies: Evaluation and Impact,” IMF Seminar on Fiscal Adjustment in Eastern and Southern Africa, September-October 1994. For a further discussion of the issues relating to subsidies, see Benedict Clements, Rejane Hugounenq, and Gerd Schwartz, “Government Subsidies: Concepts, International Trends, and Reform Options,” IMF Working Paper 95/91 (Washington: International Monetary Fund, September 1995). See also “Social Safety Nets for Economic Transition: Options and Recent Experiences,” IMF Paper on Policy Analysis and Assessment 95/3 (Washington: International Monetary Fund, February 1995).
This section is based on Poland: The Path to a Market Economy, IMF Occasional Paper No. 113 (Washington: International Monetary Fund, October 1994). For a review of fiscal performance in the states of the former Soviet Union, see “Fiscal Transition in Countries of the Former Soviet Union: An Intermediate Assessment,” IMF Working Paper 96/61 (Washington: International Monetary Fund, June 1996).
For further details of changes in the tax system, see Liam P. Ebrill and others, Poland—The Path to a Market Economy, IMF Occasional Paper No. 113 (Washington: International Monetary Fund, 1994), Appendix to Chapter II.
Drawn from Poland: Policies for Growth with Equity (Washington: World Bank, 1994).
See Balance of Payments Manual, Fifth Edition (Washington: International Monetary Fund, 1993).
In principle, the external current account balances of all countries should sum to zero, as should the sum of the countries’ capital account balances. For a number of years, however, global data on current account balances have shown a large discrepancy in the form of an excess of recorded debits. Conversely, the global capital account has shown a large positive balance or excess of recorded credits (capital inflows). These discrepancies derive from errors, omissions, and asymmetries in countries’ treatment of balance of payments statistics. Such discrepancies can undermine the credibility of analyses of global economic developments, hinder the formulation of appropriate policies, and even contribute to protectionist pressures owing to mistaken perceptions of countries’ balance of payments situations. In 1987, under a specially set up Working Party, the IMF investigated the causes of this discrepancy and recommended procedures to improve statistical practices in these areas. In 1992, a similar effort was undertaken to assess procedures for the collection of capital account statistics in the light of the growth and complexity of international capital account transactions. See the final Report of the Working Party on the Statistical Discrepancy in World Current Account Balance (Washington: International Monetary Fund, 1987) and Report on the Measurement of International Capital Flows (Washington: International Monetary Fund, September 1992).
See Chapter VII of the Balance of Payments Manual for additional details. In the case of multiple exchange rates, the conversion unit can be either a unitary rate (a weighted average of all official market rates) or the principal rate (used for most economic transactions). When there is a parallel market rate for some transactions, this rate can be used for conversions, and the official rate for the remaining transactions.
Note that nonmonetary gold, possibly including stocks held by the authorities for trading purposes, is treated like any other commodity in the balance of payments.
Many countries may still be following the Fourth Edition of the Manual, which included valuation adjustments and SDR allocations in the data on flows, and hence in the balance of payments.
If the debt forgiveness represents a write-off of debt by a private creditor, it is recorded not in the balance of payments but in the SNA under “the revaluation account.” See Balance of Payments Manual, Appendix IV (Washington: International Monetary Fund, 1993).
The discussion in this section is based on concepts derived from the Balance of Payments Manual, Fourth Edition, since many countries have yet to shift to the Fifth Edition. Moreover, analytical and policy discussions around the world continue to be conducted on the basis of the terminology of the Fourth Edition.
The Fifth Edition of the Manual includes only current transfers in this definition (see Box 4.2).
Given the definition of the current account balance (CAB) in equation 4.1, it follows that a negative balance is a current account deficit and a positive one is a surplus for the compiling country.
W. Max Corden, “Does the Current Account Matter?” International Financial Policy: Essays in Honor of Jacques J. Polak (International Monetary Fund, Netherlands Bank, 1991).
The above analysis draws on “Selected Issues in Balance of Payments Analysis” in the 1993 Manual.
See Paul Krugman, “A Model of Balance-of-Payments Crises,” Journal of Money, Credit, and Banking, Vol. II, No. 3 (August 1979).
The quarterly publication of the IMF, Direction of Trade Statistics (DOTS), presents current data on the value of merchandise exports and imports for member countries, disaggregated according to their most important trading partners. Data that are not current are supplemented by estimates. The publication includes world trade and industrial and developing country aggregates, as well as data on individual countries. Data are presented in U.S. dollars, converted at period average exchange rates. The data in the DOTS are an internationally recognized source of statistics on trade and are invaluable in analyzing trade flows.
For a comprehensive discussion of the issues in assessing a country’s trade policies and a synthesis of the literature on the empirical evidence on trade policy regimes, see Vinod Thomas and John Nash, Best Practices in Trade Policy Reform (New York: Oxford University Press, 1991); for a brief summary of the book’s conclusions, see Vinod Thomas and John Nash, “Reform of Trade Policy: Recent Evidence from Theory and Practice,” The World Bank Research Observer, Vol. 5, No. 2 (July 1991). For a discussion of the inward vs. outwart-looking strategies, see Jagdish N. Bhagwati, “Export-Promoting Trade Strategy: Issues and Evidence,” The World Bank Research Observer, Vol. 3, No. 1 (January 1988).
For a fuller discussion of the analytical and policy issues in trade policy, see Max W. Corden, Protection and Liberalization: A Review of Analytical Issues,” IMF Occasional Paper No. 54 (Washington: International Monetary Fund, 1987), and Sebastian Edwards, “Openness, Trade Liberalization, and Growth in Developing Countries,” Journal of Economic Literature, Vol. XXXI (September 1993).
The equilibrium rate may change over time because of changes in economic fundamentals such as the rates of productivity growth, technological progress, terms of trade, and the policy regime (including trade barriers and capital controls).
For balance of payments recording purposes, remittances from workers living abroad for more than 12 months (classified under “current transfers”) are distinguished from labor income earned by workers living abroad temporarily for less than 12 months (classified under “compensation of employees”).
Transportation services will be underestimated to the extent that trade is underestimated; the presence of strict controls on foreign travel may lead to parallel market activity (and hence underrecording); other services may be underreported owing to inadequate surveys.
In countries where the Fourth Edition of the Manual is still being used, the major counterpart of the current account may be referred to as the “capital account.” The Fifth Edition of the Manual recognizes that the term “capital account” is imprecise, since most transactions are purely financial, and thus renames it the “capital and financial account.”
See footnote 16 in Chapter 5 on Monetary Accounts and Analysis.
Gross debt is defined in terms of liabilities. A concept of net debt can be derived by subtracting the stock of external assets from gross liabilities. Although such a notion might be useful in countries that are both debtors and creditors (for instance, Russia), there are a number of practical difficulties in defining net debt. Currently, there is no internationally accepted definition of net debt, largely because (i) it is unclear which assets should offset liabilities—for example, should only official assets be used, or should bank and nonbank assets also be included; (ii) a net debt total would mask important differences in the maturity structure, currency composition, and risk features of liabilities and assets; (iii) debt-reporting systems may not record all gross flows in assets and liabilities; and (iv) linking debt servicing to net debt may disguise the seriousness of a country’s debt problem if assets broadly offset liabilities. For example, the quality of credit owed by Russia differs from the quality of credit owed to Russia. It would therefore be difficult to interpret the meaning of net debt service and net debt indicators. For these reasons, in this chapter, “total debt” will always refer to gross debt.
See World Debt Tables, 1994–95, Vol. 1 (Washington: World Bank, 1994).
An investor acquiring equity securities as portfolio investment will have no significant influence over the operation of enterprises.
The definition of debt does not mention the loan maturity, or loan repayment periods. Some liabilities, such as bridging loans, have very short repayment periods and can exhibit volatile behavior, but flows of long-term liabilities are more predictable. For this reason, stocks and flows of short-term liabilities (which are defined as maturing in less than one year) are usually distinguished from medium and long-term liabilities with repayment periods of more than one year.
Central governments in many countries often borrow not on their own account but to on-lend to public enterprises.
See Paul Krugman, “A Model of Balance of Payments Crises,” Journal of Money, Credit, and Banking, Vol. II, No. 3 (August 1979).
See Theoretical Aspects of the Design of Fund-Supported Adjustment Programs, IMF Occasional Paper No. 55 (Washington: International Monetary Fund, 1987).
Reserves provide an insurance against unforeseen changes in total foreign exchange outflows from the country. Therefore, a measure of expected payments is often considered the appropriate reference base. For example, if debt service payments are expected to be heavy, they can be added to the projected imports of goods and services.
The indicator can also be expressed in terms of weeks of imports, or in extreme cases, days of imports, by adjusting the import bill accordingly.
See Guillermo Calvo, “Capital Flows and Macroeconomic Management: Tequila Lessons,” International Journal of Finance and Economics, Vol. 3 (July 1996).
For more details about exceptional financing and how exceptional financing transactions are recorded in the balance of payments, see Balance of Payments Textbook (Washington: International Monetary Fund, 1996).
See The Monetary Approach to the Balance of Payments (Washington: International Monetary Fund, 1977). These concepts follow closely those underlying the IMF’s International Financial Statistics.
International Financial Statistics is published monthly by the IMF. It includes monetary and banking statistics on an internationally comparable basis. See “A Guide to Money and Banking Statistics in International Financial Statistics,” a draft, IMF, December 1984.
DMBs are often commercial banks but may also be financial institutions, such as savings banks, whose liabilities include appreciable deposits against which checks can be written to settle obligations. For more details, see “A Guide to Money and Banking Statistics in International Financial Statistics,” a draft, IMF, December 1984.
For a comprehensive discussion of the role and objectives of a central bank, see Stanley Fischer, “Modern Central Banking,” The Future of Central Banking, Chapter 2, The Tercentenary Symposium of the Bank of England, Forrest Capie, Charles Goodhard, Stanley Fischer, and Norbert Schnadt (Cambridge, Massachusetts: Cambridge University Press, 1994). See also Stanley Fischer, “Central Banking: The Challenges Ahead,” Statement at the 25th Anniversary Symposium of the Monetary Authority of Singapore, May 10, 1996.
The concept of “government” used in the monetary authorities’ accounts is often at variance with the concept that is used in other macroeconomic accounts. It is important, especially in the case of the fiscal accounts, to ensure that the reconciliation of the two accounts is based on the same concept of government.
This assumes that the government securities bought or sold cannot be used as bank reserves. To the extent that they can, purchases or sales of government securities do not affect reserve money.
It is clear that if the purchase of an asset (e.g., government securities, foreign exchange) is offset by the selling of another asset, the monetary base will not change. In this case we say that the initial action (i.e., the purchase of an asset) has been sterilized, in the sense that its impact on the monetary base and hence on overall liquidity conditions in the economy has been offset.
Others include stipulation of the types of financial assets that the central bank is permitted to acquire in ownership or as a collateral when it makes the credit available, and the maximum amount of credit that the central bank makes available to any one borrower.
In most countries with established financial markets, this type of lending is limited to providing short-term financing to smooth out temporary liquidity needs of banks or to face crises (lender of last resort). This lending often takes the form of collateralized loans against government securities.
Money is defined here as a widely accepted means of payment or a medium of exchange. As discussed below, money has other major functions.
For further details, see Chapter 4, Balance of Payments Accounts and Analysis.
Economists rely on a number of criteria to identify a financial instrument as “money.” Specifically, a financial instrument is included as part of money if it can serve as means of payment, store of value, unit of account, has a fixed nominal value, is liquid (i.e., immediately available for use), and is the legal tender.
Note that currency in circulation (CY) refers here to the currency in circulation outside banks and not to currency issued.
For purposes of monetary analysis, ΔNFA should exclude the changes in foreign exchange valuation adjustment. This is achieved in practice by valuing the foreign exchange-denominated components in the balance sheet at constant exchange rates and including the valuation adjustments, if any, in “other items, net.”
As detailed in Chapter 4 on the balance of payments accounts and analysis, an increase in reserves has a negative sign (−) and a decrease in reserves has a positive (+) sign. In contrast, in the case of net foreign reserves in the monetary survey, an increase in the NFA will be positive (+) and a decrease negative (−). Therefore, ΔRES = −ΔNFA. Also, sometimes only the change in net official international reserves held by the monetary authorities is equated with ΔRES. In this case, ΔRES will be equal only to the NFA of the monetary authorities and not to ΔNFA of the banking system at large. However, in countries where the net foreign position of the commercial banks is under the effective control of the authorities, it can be argued that the net foreign position of banks should be included with the position of the monetary authorities for the purpose of arriving at ΔRES. In this case, ΔRES has the same coverage as ΔNFA of the banking system. To the extent that NFA in the monetary survey is expressed in local currency, valuation adjustment (due to exchange rate variations) would need to be taken into account before comparing ΔNFA from the monetary survey and ARES from the balance of payments (see Box 5.8).
For a fuller discussion, see Theoretical Aspects of the Design of Fund-Supported Adjustment Programs, IMF Occasional Paper No. 55 (Washington: International Monetary Fund, September 1987); and Chorng-Huey Wong and Oystein Pettersen, “Financial Programming in the Framework of Optimal Control,” Weltwirtschaftliche’s Archiv, Vol. 1, 1979.
Income velocity is similar to a related concept called the transactions velocity of money, which is defined as the ratio of total transactions to money stock. Transactions velocity is generally higher than income velocity, because a dollar of GDP typically generates transactions worth many more dollars. Transactions velocity, unlike income velocity, is difficult to calculate.
This equation is only approximate since it omits the cross product of changes in the variables. These cross products are very small for small changes in variables.
See Jonathan Anderson and Daniel Citrin, “The Behavior of Inflation and Velocity,”in Daniel A. Citrin and Ashok K. Lahiri, eds., Policy Experiences and Issues in the Baltics, Russia, and Other Countries of the Former Soviet Union, IMF Occasional Paper No. 133 (Washington: International Monetary Fund, 1995).
If the income elasticity of the demand for money is one, changes in real income do not affect velocity. Velocity will increase (decrease) if the elasticity is less than one (greater than one).
The initial expansion of reserve money by the monetary authorities leads to subsequent expansion by the deposit money banks through the multiplication of resources deposited with them. This is made possible because, of each amount deposited, only a fraction (determined by the reserve requirement) need be kept by the DMBs in reserve; the rest is typically lent and hence will eventually give rise to a deposit that, in turn, will serve as a basis for new loans. At the end of the process the amount of deposit created will be a “multiple” of the original increase in reserve money.
It is important to note that when banks lend money and the borrowers gain purchasing power, borrowers incur a debt obligation to the bank. For this reason, loans do not increase the net worth of the borrower, which is calculated as assets minus liabilities. In other words, the money created by the fractional reserve system increases the economy’s liquidity, but not its wealth.
In the absence of credit ceilings, excess reserves reflect DMBs’ preference for liquidity and are influenced by the exact nature of the reserve requirement (e.g., end-of-period level or weekly average), the penalty imposed by the central bank for violation of the requirement and the opportunity cost of holding excess reserves.
The yield curve depicts a relationship between the maturities of financial assets with similar characteristics and the rates of return on these assets. Depending on expectations concerning future interest rates, the yield curve can be upward sloping (with longer maturities fetching higher interest rates) or downward sloping.
Adapted from World Economic Outlook (Washington: International Monetary Fund, October 1994).
See Ratna Sahay and Carlos A. Végh, “Dollarization in Economies in Transition: Evidence and Policy Issues,” IMF Working Paper 95/96 (Washington: International Monetary Fund, 1995), and Guillermo A. Calvo and Carlos A. Végh, “Currency Substitution in Developing Countries: An Introduction,” Revista de An´lisis Economico, Vol. 7 (June 1992), pp. 3–27. See also Guillermo A. Calvo, Money, Exchange Rates, and Output, chapters 8 and 9 (Cambridge, Massachusetts: MIT Press, 1996).
In the absence of data on foreign cash held by the public and on foreign exchange deposited in banks abroad, estimates of the extent of dollarization are based on domestic foreign currency deposits only. For this reason, dollarization ratios frequently underestimate the phenomenon of currency substitution.
See, in particular, Box 3.1.
For a comprehensive analysis of monetary policy issues in a transition economy, see David K. Begg, “Monetary Policy in Central and Eastern Europe: Lessons After Half a Decade of Transition,” IMF Working Paper 96/108 (Washington: International Monetary Fund, 1996).
See Daniel A. Citrin and Ashok K. Lahiri, eds., Policy Experiences and Issues in the Baltic Countries, Russia, and the Other Countries of the Former Soviet Union, IMF Occasional Paper No. 133 (Washington: International Monetary Fund, December 1995).
This section is illustrative in nature and is not meant to be a formal treatment of IMF transactions. For more precise and formal definitions of the concepts introduced in this appendix and discussion of the transactions with the Fund, see Financial Organization and Operations of the IMF, IMF Pamphlet Series, No. 45, Fourth Edition (Washington: International Monetary Fund, 1995).
The member country agrees to make such funds available, on demand, to the IMF. To do this, the country opens the so-called IMF No. 1 Account or issues to the IMF a nonnegotiable security cashable on demand.
A member is required, however, to maintain a minimum balance of one-fourth of one percent of quota in the Fund’s No. 1 Account.
At a fundamental level, the difference between the flow of funds approach and the traditional market equilibrium approach is that the sectoral balances are treated as constraints in the former, while market equilibria (supply equal to demand) are treated as constraints in the latter. This point and the importance of the flow of funds framework to financial programming are clearly brought out in Chorng-Huey Wong and Oystein Pettersen, “Financial Programming in the Framework of Optimal Control,” Weltwirtschaftliche’s Archiv, Vol. 1, 1979.
Please note that in this chapter, the terms nongovernment sector and the private sector are used interchangeably.
For a more detailed treatment of this topic, see Marcelo Caiola “A Manual for Country Economists,”IMF Institute and Research Department (Washington: International Monetary Fund, 1995). See also R.FG. Alford, Flow of Funds: A Conceptual Framework and Some Applications (Crower Publishing, 1986).
This equivalence, of course, abstracts from the statistical and measurement problems that are always present in the actual data.
For more details and for an interactive use of the flow of funds, see “Interrelation Among Macroeconomic Accounts,” CD-ROM, IMF Institute, International Monetary Fund, 1996.
The derivation of the government saving-investment gap in terms of the government’s disposable income and its consumption is as follows. Recall that Sg = Rg − Cg (Chapter 3, equation 3.1). The government’s disposable income is now defined as total government revenues and grants (Rg), net of government transfers (TRg) and interest payments on government debt (INTg). Government transfers and interest payments are deducted because they constitute income for the private sector (the nongovernment sector) and as such, are included in the disposable income of the private or the external sector.