A Framework for the Determination of Central Banking Policy

THE DETERMINATION of monetary policy is an exercise that must include the organization of information so that proper conclusions may be reached regarding the application of policy instruments. The information on which policies have to be based is frequently a complex set of interrelated data. Changes in the level of international reserves, the government’s deficit, the volume of bank advances to the private sector, inter alia, all influence the community’s stock of money. Conditions in foreign countries, the government’s budget, the stock of money, and other circumstances, in turn, influence the level of international reserves. Even the government’s deficit or surplus is partly determined by the levels of income and prices that are subject to the influence of monetary policy, as well as by its own revenue and expenditure decisions. Hence, the ordering of financial data, so that interrelations such as these may be recognized and assessed, is an essential first step in arriving at central banking decisions.


THE DETERMINATION of monetary policy is an exercise that must include the organization of information so that proper conclusions may be reached regarding the application of policy instruments. The information on which policies have to be based is frequently a complex set of interrelated data. Changes in the level of international reserves, the government’s deficit, the volume of bank advances to the private sector, inter alia, all influence the community’s stock of money. Conditions in foreign countries, the government’s budget, the stock of money, and other circumstances, in turn, influence the level of international reserves. Even the government’s deficit or surplus is partly determined by the levels of income and prices that are subject to the influence of monetary policy, as well as by its own revenue and expenditure decisions. Hence, the ordering of financial data, so that interrelations such as these may be recognized and assessed, is an essential first step in arriving at central banking decisions.

I. Monetary Analysis and Monetary Policy

THE DETERMINATION of monetary policy is an exercise that must include the organization of information so that proper conclusions may be reached regarding the application of policy instruments. The information on which policies have to be based is frequently a complex set of interrelated data. Changes in the level of international reserves, the government’s deficit, the volume of bank advances to the private sector, inter alia, all influence the community’s stock of money. Conditions in foreign countries, the government’s budget, the stock of money, and other circumstances, in turn, influence the level of international reserves. Even the government’s deficit or surplus is partly determined by the levels of income and prices that are subject to the influence of monetary policy, as well as by its own revenue and expenditure decisions. Hence, the ordering of financial data, so that interrelations such as these may be recognized and assessed, is an essential first step in arriving at central banking decisions.

Further, it must be recognized that “monetary policy is essentially forward looking … and it does not mean that in looking ahead we should take a very limited time horizon and be so concerned with the next few months that we fail to pay attention to the next few years.” 1 Any schema for monetary analysis must be directed toward projection rather than primarily toward historical evaluation. Historic series are essential for monetary projections, but they should be considered as background information on which future policy decisions may be based. Therefore, the appropriateness of any system of monetary analysis must be judged primarily in terms of its usefulness in enabling central bankers to estimate the probable changes in monetary variables and of the significance of these variables for the consideration of alternative decisions with regard to monetary policy.

It is extremely difficult to obtain a reasonable view of the future unless it is possible to assign some quantitative magnitudes to the significant monetary aggregates. In all countries, but particularly in the less developed, the immediate monetary situation may be judged largely in terms of the level of international reserves and the comparative rates of growth in bank credit and money. If bank credit is growing faster than the stock of money that the community is willing to hold, a country’s international reserves are endangered. In all countries, however, there is a lag between the growth in bank credit and in expenditure. One of the important functions of monetary analysis is to detect divergent movements between the important aggregates that are likely to result in a lagged effect on reserves (or domestic prices).

Central bankers are faced with the terrifying complexity of information and relations between variables that typifies the financial structure of any economy. In order to classify the statements and to clarify the financial relations in an economy, the bankers need an organized arrangement of the available information. It may be argued that a central bank should have a complete set of financial accounts for the economy at its disposal. Such a statistical achievement may be regarded as an ideal. While, in many countries, particularly the developing ones, this ideal may be accepted as a long-run objective, the development of adequate monetary statistics is the first step toward this end.2

A unified set of monetary accounts provides a framework within which to portray the complete structure of monetary relations and to make clear the relation of one set of data to another. Even in countries with relatively few financial statistics, the outside observer occasionally feels overwhelmed by the variety of information available to him. Sometimes the most immediate problem is one of organizing the available data into a comprehensive pattern in order to have some indication of the financial interrelations within an economy and to be able to assess the importance of individual period-to-period variations in known financial aggregates.

If statistics are to be useful in determining monetary policy, they must not only describe the conditions in the country where the central bank is operating but also be directed toward the policy instruments used by the central bank. To this end, a central bank’s statistics must be operational, in the sense that they should indicate the direction in which the available policy instruments may be used. Specifically, the financial magnitudes that are most subject to central bank influence must be strongly highlighted in the statistical system developed for determining central bank policy.

II. The Determination of Monetary Policy

The assimilation of and influence on domestic financial aggregates

It may be accepted that a central bank has the responsibility “to regulate the value of the [national] currency in such manner as shall be most conducive to the country’s welfare, and in that connection to stabilize the said value so far as possible” 3 in order to contribute “to the orderly and balanced economic growth of the country and the external stability of the currency, and to act as banker and financial adviser to the government.” 4 This injunction may be interpreted as being one to follow policies that will ensure that the community has an adequate, but neither inadequate nor excessive, stock of money5 and other financial assets. Thus, the determination of the adequacy of this stock must be one of the first steps in the formulation of monetary policy.

The growth in the currency and deposits that the community may be expected to be willing to hold may provide a basis for a central bank’s determination not only of the limits within which the monetary system may expand, consistent with the maintenance of monetary stability, but also of the extent to which it should expand if the economy’s potential output is to be realized. The optimum growth in the monetary system’s assets that is essential to foster development is equal to, and made possible by, the optimum growth in its liabilities.

It may be assumed that the community’s desired holdings of money will grow from year to year. As output and incomes rise, the demand for money may be expected to rise. As a first approximation, a central bank should follow policies that will allow for a rate of increase of money and other financial assets equal to the expected, sustainable rate of increase in the country’s output.

In all but the wealthiest countries,6 even without any change in habits, the demand for money will probably rise more rapidly than the country’s output. Individuals and businesses, having unchanged desires, will hold progressively larger stocks of money and other financial assets relative to their incomes, as these incomes rise. Money and other financial assets may be regarded as “luxury goods” providing security against unforeseen contingencies, or the ability to purchase relatively expensive items. These wants take a subordinate place until the basic necessities of life have been supplied. As the spread between incomes received and the basic requirements for subsistence widens, the amount of income that can be devoted to the accumulation of money increases. Hence, with “constant habits,” a central bank should base its policy on the assumption that it must allow for a somewhat more rapid rate of growth in the community’s stock of money and other financial assets than in its income and output.

While the authorities should strive to maintain monetary stability, they must allow for some increase in prices in the modern world.7 In projecting the demand for financial assets, they must recognize that the demand is related to the growth in the money income rather than in the physical value of output. Therefore, an increase of something like 1-2 per cent in the stock of financial assets might be a reasonable allowance for the inevitable increases in prices even in countries that are regarded as financially stable.

The “excess” growth in the demand for money, i.e., the increase that is in excess of that related to the growth in the money value of output, is a growth in the demand for precautionary and similar balances rather than in transactions balances, and in large part it will consist of a rise in the holdings of the less poor members of the community. This is likely to be concentrated in a growth in the demand for deposits, with a concurrently relatively slow growth in the demand for currency. Thus, in most countries, it would seem to be desirable to include separate data for currency and deposits in the monetary survey. For the projection of monetary policy, it may be recognized that deposits are primarily liabilities of the deposit-money banks,8 and currency is usually a liability of the central bank or other monetary authority. Consequently, the satisfaction of the community’s demands for these financial assets will involve different types of decision by the monetary authorities.

At the same time, it must be recognized that the community’s transactions balances (and some of their precautionary holdings) will be distributed between currency and deposits in a manner determined primarily by convenience. In particular, even though the precautionary balances may be concentrated in deposits,9 it is impossible, given the institutional structures of most countries, to separate some, at least, of these precautionary balances from transactions holdings. Further, as the distribution of transactions balances will shift during the year between currency and deposits as a reflection of payments patterns,10 the differences between deposits and currency should not be overemphasized. The essential similarity between currency and monetary deposits should, for most countries, be recognized by the incorporation of their sum by an entry for “money” as an important total in the monetary survey.

The accommodation of balance of payments effects

In most countries, and particularly in the less developed ones that are highly dependent on international trade, the realized growth in a monetary system’s liabilities is likely to be little different from the optimum. In any economy that is open to international influence, any credit and monetary expansion in excess of the optimum will probably result in excess domestic demand that will be covered by excess imports and in a consequent shortfall in the actual monetary expansion matched by a depletion of international reserves. Conversely, an original expansion of less than the optimum may lead to deficient domestic demand, a shortfall of imports, and a consequent increase in international reserves. The dangers in an excessive depletion of international reserves are immediately apparent: an accumulation of reserves greater than called for by financial prudence represents foreign investment abroad rather than the domestic investment that a central bank should foster to achieve economic development.

For all countries, the maintenance of the external stability of the currency, including the maintenance of an adequate level of international reserves, must be regarded as a prerequisite for the development and maintenance of a sound monetary system.11 Therefore, in developing its monetary policy, a central bank must accept an international reserve target that not only is consistent with the balance of payments possibilities but also is accepted in the light of the direction in which it is desired to push the balance of payments.12 The financing of this balance of payments objective must be an overriding claim on the operation of the monetary system.

The projection of changes in the level of international reserves is a fundamental element in the determination of monetary policy that may be made on the basis of past experience and current prospects. This projection may also be taken as a target. In the first place, any forecast of the balance of payments must be uncertain, and the central bank can influence the result that is achieved by adopting an international reserve target and formulating a monetary policy that is consistent with the attainment of this objective. In the second place, any inconsistency between the monetary policies actually adopted and the requirements of monetary stability is likely to be reflected largely as a change in international reserves. This second aspect could almost be rephrased in this way: If a central bank adopts a target (and policies consistent with that target) for the level of international reserves, it will be approximated—even at the cost of monetary instability. In practice, the central bank should adopt a target for the level of international reserves that is in keeping with balance of payments expectations, but it should be prepared to alter this target within a range that is consistent with maintaining the external stability of the currency. Just as changes in the international reserves of the monetary system are the final conclusion of an analysis of the balance of payments, the balance of payments record (and its projection) is part of a system of monetary analysis.

The monetary effects of fiscal policies

A central bank is also usually charged with serving as banker and financial advisor to the government. Interpreted broadly, this can mean that the bank is charged with meeting the government’s cash requirements: financing deficits and absorbing surpluses. No central bank should be asked to meet this responsibility entirely passively. It is the financial advisor to the government and must present its views on the government’s financial requirements, and the government has an obligation to listen respectfully to the bank’s views. Yet, in the last analysis, subject to such constitutional restraints as may be imposed on it and, above all, subject to the influence that it may exert in the interests of financial stability and long-run economic growth, the bank must be ready to cover those financial requirements of the government that cannot be met from other sources.

In large part, the size of both the government’s deficit and its foreign borrowing are major economic policy decisions to be made in the light of their potential effect on the monetary situation. If the government’s requirements take too large a part of the credit that is available consistent with monetary stability, a case may be made for altering fiscal or foreign debt policy. As alternative policies are considered, they may be assessed, in part, on the basis of their effects on the monetary survey. Further, these effects can provide guides to the direction in which policies may be shifted. By relating one set of financial magnitudes to the entire set of financial relations, it is possible to view individual policy decisions in their proper perspective.

For financial analysis, the government’s borrowing (i.e., its creation of debt) is the focus toward which attention should be directed; hence, an analysis of the government’s revenue should exclude receipts from borrowing. On the expenditure side, the consideration of lending need not be parallel to that of borrowing. Government loans, including advances to development banks and similar institutions, are a use of financial resources to achieve government policy. To that end, they are similar to other expenditures rather than to offsets of borrowing. However, these loans are the counterparts to borrowing by other sectors of the economy, and consequently they should be clearly identified even in summary government accounts.

The government’s borrowing requirement, particularly the domestic component thereof, should not be accepted as an immutable requirement on the financial system. It should be determined in a realistic light of the available sources of finance. In the first place, the government should have a deficit at least equal to the community’s direct demand for government debt. In most developing countries, at least, this demand will be far below the government’s requirements for investment finance, and, in compiling financial programs, this source of finance must be assessed realistically. The banking system is a second source of finance, but the funds available from this source are strictly limited if domestic financial stability is to be maintained and if adequate resources are to be made available to the private sector of the economy. In any projection, the government’s total financing requirement minus the net amount of government securities that the public is likely to wish to buy voluntarily minus the amount that the banks may absorb safely is a measure of the foreign borrowing requirement. If this projected financing requirement suggests that little recourse need be made to foreign sources of capital, it may be possible to revise the expenditure estimates to contemplate increased domestic investment. If the projected financing, and the domestic financing that will become available, suggests that the recourse to foreign borrowing will involve unduly heavy foreign debt servicing costs, either the contemplated expenditure or the revenue program, or both, must be revised.

An assessment of the government’s reasonable financing requirements, and the appropriate level of net foreign borrowing (or net debt repayment), provides a basis for estimating the sustainable domestic financing. A reasoned judgment of the amounts of government debt that will be purchased voluntarily by the deposit-money banks, other financial institutions, and businesses and individuals should provide a measure of the burden of government financing that is likely to fall on the central bank. Even in the absence of constitutional restraints on the central bank, steps may have to be taken to keep the level of this financing within limits to ensure the maintenance of monetary stability. However, provided that these limits are not exceeded, the government’s financing requirements may be the second over-all constraint on the central bank.

The accommodation of the private sector

On the assumption that the financing of desired changes in the level of international reserves and the financing of the government’s requirements must have prior claims on the community’s monetary savings, the financing of the private sector will be a residual claim on the community’s financial saving.13 The fact that the projection of lending by the monetary system to the private sector may be made residually does not imply that the first projection in any analysis must be accepted. Monetary analysis is a largely reiterative process. If an original projection indicates that the private sector would be receiving an inadequate supply of credit, and that economic development would thereby be depressed, the analysis must be reconsidered. In particular, the bank’s advice to the government regarding its fiscal and borrowing policies should be given in the light of the country’s international reserve requirements and the financing of the private sector implicit in any decisions regarding government borrowing. This possible reiteration within a framework of interrelated analysis is a clear example of the way that a fairly complete set of monetary accounts may be used to arrive at a consistent set of financial policies. In particular, one of the main reasons for developing a monetary survey is to forge an instrument for assessing the internal consistency of a country’s financial policies, to ensure that orderly development is encouraged.14

Influence over financial institutions

Within the constraints provided by the balance of payments and reasonable governmental financial requirements, it is a central bank’s responsibility to influence the economy to create an environment that will be not only conducive to the maximum level of expenditure by the community but also consistent with monetary stability. In practice, the central bank must achieve this aim primarily by exerting pressure on those national financial institutions that deal directly with the private sectors of the economy—principally on the deposit-money banks.15

It may be assumed that the private sector obtains all of its monetary financing from the deposit-money banks and none from the central bank. The required growth in this component of monetary finance, as indicated by the projection of the monetary survey, provides the first element that may be incorporated in the projection of the deposit-money banks’ balance sheets.

In a stable society, the deposit-money banks will probably have a set of preferences for the distribution of their holdings among claims on the private sector, on foreigners, and on the government. The banks may desire to be free of foreign assets or of government debt. In many countries, they wish to hold certain rather stable portions of their assets in these forms; in others, they shift between various types of asset in a reasonably predictable manner. It is appropriate for the central bank to exercise moral suasion on the other banks to maintain constant or steadily changing preferences, provided that this persuasion is not used in an attempt to make the banks depart too far from their immediate asset preferences. In some countries, requirements concerning liquid assets impose certain conditions on the banks’ holdings of government debt; in others, the government’s allocative credit policies may require the banks to hold specified amounts of government securities.16 In any event, the banks’ demand for foreign and government assets should be reasonably predictable.

The projection of the demand for deposits provides the basis for the first projection that is immediately related to monetary policy—that of the demand of the deposit-money banks and other banks for cash reserves. If the deposit-money banks are to be in a position to extend credit commensurate with the demand for deposits, they need adequate cash reserves. The provision of these reserves is the central bank’s prime policy obligation. The estimation of the banks’ cash reserve requirements will be a product of their cash reserve policy. In countries where the banks traditionally maintain constant cash reserve ratios, the projection of their reserve requirements may be based on the projected demand for deposits. In these countries, it will be necessary to separate the projected demand for reserves only into its currency and central bank deposit components. This may be done on an observation of the banks’ traditional practices. In countries with a high minimum cash reserve requirement, the required ratio will provide an estimate of the basic element in the banks’ requirements for reserves. If this requirement must be met by deposits with the central bank, the projection will be simplified. Beyond this, it will be necessary to estimate the banks’ demand for till-money holdings of currency and precautionary excess reserve holdings of central bank deposits. These estimates are also likely to be simple and based on observation of the banks’ recent practices. Where the banks are permitted to incorporate till money in their required reserves, the estimation may be slightly more complex but essentially similar to that required where central bank deposits are the only assets that may be included in the required reserves.

With a given cash reserve requirement, a target figure for bank credit to the private sector, and predictable bank holdings of foreign assets and government debt, it is possible to project a structure of the deposit-money banks’ assets that is consistent with monetary equilibrium, external balance, and a high utilization of the country’s resources. It becomes the important problem for central banking policy to ensure that the banks’ liabilities match their asset requirements.

In some respects, the determination of the appropriate level of central bank credit may be the crucial decision for central banking policy. In practice, this decision may be based on a projection of deposit-money bank accounts. The main element in this projection is the projection of deposits that is consistent with monetary equilibrium. After allowance for miscellaneous accounting items in the banks’ balance sheets, the difference between the projected level of deposits and the total of specified bank assets that the central bank wishes to achieve provides a measure of the shortfall that monetary policy must cover. This residual is the volume of central bank lending to the deposit-money banks that is consistent with monetary equilibrium.

Given the interlocking nature of the monetary relations in any economy, these required elements (balances due to and due from the deposit-money banks) and the residual elements from the monetary survey (foreign reserves in addition to those held by the banks, claims on government other than those held by the banks and the nonmonetary sectors, and currency in circulation) will provide a balanced set of central bank accounts that may be accepted as a target for monetary policy.

It is thus possible to use the projection of the deposit-money bank accounts as a basis for the projection of the requirements for the two prime elements of central bank policy—the level of deposit-money bank cash and the volume of central bank lending.

III. Concluding Observations

A monetary analysis along lines similar to those outlined here may provide guides for determining monetary policy. A properly organized accounting structure should have a prominent place in this analysis. Such a schema would organize the available financial data and particularly would highlight the important financial aggregates. Existing information can then provide indications of the direction in which an economy is moving and of those changes in direction that should be encouraged. Even an incomplete system of accounts can provide suggestions regarding the course of events. The accounts that may be developed most readily are likely to be those that are available within a month or a little more after the end of the period described. The government’s financial accounts should be available almost weekly (unfortunately, they are often inexplicably late in preparation). These partial sector accounts can provide guides to economic policy long before such statements as the national income and expenditure accounts can be compiled. Hence, partial financial accounts may be more useful operational guides to policy than more comprehensive records that may not be available quickly enough to indicate necessary changes in economic activity in time for the changes to be implemented. The accountant should not wait for the complete development of a statistical system before he releases his preliminary conclusions for comments. This is one field where the impossibility of achieving the perfect should not be the enemy of the publication of the satisfactory.

It should not be assumed, however, that monetary analysis can proceed in a purely mechanistic way based simply on a set of statistical tables. While most monetary relations are essentially stable, they are all subject to minor erratic variations. For example, a monetary analysis can provide a target figure for central bank lending to the deposit-money banks. In practice, however, the central bank decision may not be defined in quantitatively precise terms; it may be a decision to be more or less liberal in the granting of credit, or to maintain the current level of advances. That is, while the target derived by monetary analysis for central bank credit may be accepted, actual policy may be directed toward approximating it in the light of current conditions rather than toward achieving a specific monetary value.

In brief, while a monetary analysis may be an essential foundation for monetary policy, the actual implementation of that policy must be based on the central banker’s judgment.


Appendix IA. A System of Monetary Accounts 17


The arguments in the preceding discussion of the determinants of monetary policy can be expressed in schematic accounting terms. Such a pro forma set of accounts has been outlined in this paper to indicate the stages by which a monetary analysis may be developed.18 For purposes of exposition, such a set of accounts may be presented as a set of single, dated statements. Time series are essential for purposes of analysis and projection, i.e., the statements should be historical records and projections of the balance sheets summarized in the analytic statements.

In principle, any monetary system may be viewed statistically as a set of accounts describing the structural relations of the financial system and the set of inherently interrelated changes19 in the system that are recorded in the accounts. These statistics are historical records of the community’s financial transactions or projections indicating the financial magnitudes toward whose attainment monetary policy should be directed. Such a set of interrelated accounts is the essential basis for the analysis of the monetary developments in any economy. The maintenance of such a set of historical statistics, and their projection on the basis of alternatively possible developments in the underlying conditions (e.g., the alternative prices and supplies of major exports, and the prices of imports), is a major responsibility for any central bank research department.

For these purposes, the International Monetary Fund’s presentation of monetary data in its publication, International Financial Statistics (IFS), provides a satisfactory, and widely accepted, foundation. However, the IFS presentation must be regarded as a skeleton that, while appropriate for many of the purposes of monetary analysis, must be fleshed out in any system of monetary analysis that is to be considered adequate for the actual determination of monetary policy.

This “fleshing out” will vary markedly from country to country depending on national circumstances. However, it is possible to suggest lines along which it might progress. In the analytic framework outlined here, it is assumed that the banking system is required to maintain minimum cash reserves with the central bank in amounts that are large enough to provide a constraint on the banking system—that is, the required minimum cash reserves are not lower than the deposit-money banks would like to hold for pure liquidity purposes, and, as a consequence, they will desire to minimize their excess cash holdings. It is further assumed that (1) the deposit-money banks (in order to obtain cash reserves) must have recourse to central bank credit;20 (2) the central bank is prepared to alter the volume of this credit at its discretion; and (3) private businesses and individuals present a sufficiently strong demand for bank credit to encourage the deposit-money banks to take up the full amount of central bank credit available to them.

The set of accounts outlined here may not be appropriate for all countries, but they may be useful in countries where the monetary system operates on the assumptions outlined above. It is suggested, however, that the framework of analysis outlined here, with suitable adjustments, might be applicable in a fairly wide range of institutional relations.

The Monetary Survey21

The statement

As indicated above, the monetary survey may be both the final summary of a system of monetary analysis and the core around which it may be developed.

Such a monetary analysis may well start from an assessment of the community’s demand for money and other financial assets along the lines suggested in the main text. The estimation of this basic constraint should be followed by estimates of the demands on the financial system for financing the changes in the level of international reserves and estimates of the government’s borrowing requirements from others than nonresidents and the nonbanking sectors of the economy.

The entries
Foreign assets (net)

The level of the monetary system’s net foreign assets is a major constraint on, and a major objective for, monetary policy. Therefore, not only past records but also future projections of this aggregate should form an important part of any monetary analysis.

Net claims on government

The monetary system’s net claims on the government are the final product of the government’s cash requirements, its foreign borrowings, the deposit-money banks’ appetite for government debt, and the central bank’s responsibility for covering the government’s cash requirement.

Claims on private sector

In developing a system of monetary accounts, it is possible to consider the extension of credit to the private sector of the economy 22 as a residual. The adequacy of this total is one of the important assessments of the consistency of all the monetary projections with stability and satisfactory economic growth.

Table A.

The Monetary Survey1,2

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The financing of government agencies has been consciously ignored in these pro forma tables. Allowance for their requirements can easily be made along lines similar to those outlined here for determining the government’s financing requirements.

The arithmetic calculation of the consolidated accounts is indicated in Appendix IB.

Assets = liabilities

The total of the above components, derived as the total of liabilities, is a useful calculating entry but is of little economic significance.23

Currency in circulation

The measurement of the community’s demands for financial assets is a major aspect of financial analysis, and the projection of these demands may be a first step in a forward-looking financial analysis. As the demand for currency is largely a demand for transactions balances, its projection should be a relatively simple element in the projection of the total demand for financial assets.

Monetary deposits

In all countries, some deposits are simultaneously transactions balances and liquid reserves for their holders. Where these can be identified, their measurement and projection might well be undertaken as a separate part of the assessment of the community’s demand for financial assets.


Insofar as the community’s demands for currency and monetary deposits are the products of similar stimuli, and as shifts between currency and monetary deposits are frequently the product of seasonal or extraneous factors 24 that leave the sum of the two essentially unaltered, it is useful to recognize their similarity and “moneyness” by incorporating a total for money in the monetary survey. Even recognition of the haziness of the division between money and quasi-money does not detract from the usefulness of a total for money in financial analysis.

Quasi-monetary deposits

In most countries, part of the community’s primarily liquid reserve assets is held in the form of bank time, savings, and similar deposits. The measurement and projection of the demand for these assets should usually be a separate step in the assessment of the demand for financial assets.

Other items (net)

The foregoing entries do not provide a complete catalog of all the items in a consolidated balance sheet for the monetary system. In some countries, the banks have nondeposit-type liabilities that are important financial assets for the rest of the community (e.g., bonds, participations, etc.). Where these types of claim exist, they should be identified in the monetary survey.

In addition, all banking systems have assets and liabilities that are of little significance for monetary analysis (e.g., premises and furniture, prepaid expenses, capital and reserves, accrued charges, etc.). A net entry for such items is necessary to indicate the balanced form of the monetary survey, but the identification of such items is unnecessary for monetary analysis. Hence, a total net entry for all of these nonsignificant items is adequate for most monetary surveys. If this entry should be relatively large, or if it should vary markedly over time, identification of its important components would be appropriate.

The Institutional Accounts


A monetary survey provides a general indication rather than specific guides to central banking policy. More detailed analysis of the working of the banking system is essential for the actual formulation of policy.

On the assumption that financial projections may be based on the community’s demand for financial assets (particularly money) and for credit, these projections may proceed from an analysis of the deposit-money bank accounts to an analysis of the central bank’s accounts. That is, financial projection is an exercise designed to base the requirements for a central banking policy consistent with monetary stability on the demand for financial assets.

The monetary authority account
The monetary authorities

The central bank is the only monetary authority in many countries. In those countries, a central bank analytic statement will provide all the summary information required for the compilation of a monetary authority account. In others, some of the responsibilities traditionally vested in the monetary authorities are accepted by either the government (e.g., through maintenance of the country’s international reserves or issue of part of its currency, i.e., its coin component) or a government agency (e.g., through an exchange account). In these latter instances, a true monetary authority account would be a consolidation of the central bank account with a summary of the government’s monetary authority activities.

The entries

Foreign assets. Estimates of changes in the monetary authorities’ foreign assets may usually be derived as the difference between the monetary survey projection of foreign assets and the projected demand on the part of the deposit-money banks. Sometimes a projection of the central bank’s net foreign assets, rather than of its gross holdings, would be more appropriate (but see comments on Foreign liabilities, p. 233).

Claims on government. The central bank has the responsibility for covering the government’s residual financial requirement. The amount involved is the government’s domestic cash requirement (i.e., excluding foreign borrowing) less the absorptive capacity of domestic individuals and nonfinancial businesses, financial institutions other than banks, and the deposit-money banks (Table D). The central bank’s financing of the government will usually involve the holding of government obligations and the provision of deposit facilities. It is an open question, to be resolved largely on the basis of local institutions and traditions, whether an analytic statement of the government financing by the central bank should record the net or gross requirements of the government. If the former approach is adopted, there will be only one entry for the government’s requirements in the monetary authority statement; if the latter approach is adopted, a government deposit liability will also be required in this account.

Table B.

The Monetary Authority Account

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Claims on private sector (not shown in Table B). In most countries, the central bank refrains from extending credit direct to the private sector. It meets its obligation to ensure that there is an adequate level of credit creation by meeting any requirements in this respect indirectly by refinancing deposit-money bank credit.

Claims on deposit-money banks. This entry measures the most important element in central banking policy.25 Its projection may best be made, however, as a residual estimate in the projection of the deposit-money bank accounts that is consistent with monetary equilibrium.

Assets = liabilities. The total of the above components. Given the interlocking nature of the monetary relations in any economy, not only the actual but also the projected total of the central bank’s assets must be equal to the total of its liabilities, if the accounts are statistically consistent.

Reserve money. In some respects, the central bank’s primary responsibility is the provision of an adequate level of reserve money (currency in circulation plus deposits with the central bank). Hence, this total may be one of the focal points for monetary analysis. However, as the community’s demand for currency is the product of forces significantly different from the deposit-money banks’ demand for central bank deposits, and as it is also possible to consider the supply of central bank deposits as the most important element in central banking policy, these two components of reserve money should be identified in any monetary analysis.

Cash reserves of deposit-money banks. The projection of this entry may best be made as a requirement for the projection of the deposit-money bank accounts that is consistent with monetary equilibrium.

Required reserves. Even in the monetary authority account, it is appropriate to identify that part of the banks’ cash reserves that is the minimum required under the banking legislation or other regulations.

Other bank deposits. The banks’ “excess” reserve holdings.

Currency in circulation. This entry incorporates in the central bank accounts the projection made for the monetary survey.

Government deposits. See comments on the entry, Claims on government.

Foreign liabilities (not shown in Table B). In some countries, the central banks have large foreign liabilities. In these circumstances, their management may pose a problem for monetary policy, and a separate recording of foreign liabilities may be preferable to a simple statement of net international reserves.

The central bank account

As noted previously, in those countries where the central bank is the only monetary authority, a single statement of its accounts provides an adequate statement for the projection of monetary policy. In those countries where the responsibility for monetary policy is divided either effectively or on a pro forma basis, it is desirable to present separate analytic statements for the central bank and the other monetary authorities. A central bank has immediate responsibilities. It can control its own assets directly. It must determine its policies in terms of its own decisions concerning assets. For these purposes, a central bank account, as well as a consolidated monetary authorities’ account, is an essential element in a system of accounts that may provide a basis for the determination of monetary policy.

The central bank component of the monetary authority account should be an analytic condensation of the central bank’s balance sheet, with the various entries consolidated into the categories adopted for the monetary authority account, which is, in turn, consistent with the monetary survey.

Table B.1.

The Central Bank Account

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The treasury monetary account

In many countries, the government accepts monetary responsibilities, some of which are monetary authority responsibilities (e.g., those pertaining to the issue of coins and the holding of foreign reserves); others are “banking” responsibilities (e.g., the acceptance of personal giro and other deposits). For statistical purposes, it is desirable to separate the accounts relating to these responsibilities, even if this involves some arbitrary allocation of the government’s assets.26

The treasury account relating to its monetary authority responsibility is essentially a work sheet rather than an analytically significant statement. Its main purpose may be only to provide for the statistical integration of the government’s foreign reserve and currency-issuing activities into the monetary authority account.

Such a statement is simply a record of the government’s actual or projected foreign assets (including gold, SDR’s, reserve positions in the Fund, etc.) and of its conceptual currency liabilities. Each of these types of entry has a double-entry counterpart. Foreign assets are resources available to the government, similar to its deposits with the central bank. If it is deemed appropriate to record the government’s net position vis-à-vis the central bank, these “deposits” should be treated as negative claims on the government.27 Currency issues provide resources for the government similar to the resources provided by government borrowing. Hence, the counterpart to currency issues is similar, in economic effect, to a claim on the government by the monetary system and may be incorporated in this classification in the monetary authority account (and monetary survey). In practice, it seems most advisable to include only one counterpart balancing entry (net claims) in the treasury account for incorporation in the monetary authority account (and in the monetary survey).

Table B.2.

Treasury Monetary Account

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The deposit-money bank account
The role of deposit-money banks

In many countries the deposit-money banks form a relatively homogeneous group of institutions. Even though some of them may be government owned and some privately owned, if they are subject to common regulations and engage in similar types of business, they may be considered to be homogeneous and a consolidated statement for all the deposit-money banks may be an adequate component in a set of monetary accounts. In any event, a consolidated statement of the accounts of the deposit-money banks should be part of such a set.

The entries

Cash reserves. The assessment of the role of the cash reserves of the deposit-money banks is a key requirement for an analysis of the domestic banking operations. Forecasts of their projected value may be based on the projected demand for deposits, and the stipulated, customary, or otherwise forecastable, cash reserve policy of the deposit-money banks.28

Required reserves. In most countries, the banks are required to maintain a minimum percentage of their deposit liabilities (or differing percentages of different types of liabilities) in cash (deposits at the central bank, or deposits plus currency).29 Changes in this minimum percentage (or structure of percentages) are frequently used as an instrument of monetary policy. Hence, the level of this monetary policy aggregate is an important statistic for monetary analysis that should be identified in a statistical presentation.

Table C.

The Deposit-Money Bank Account

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Other reserve holdings. In some respects, the “true” cash liquidity of the banks may be measured by the level of their “excess” reserves, i.e., the holdings of cash in excess of their minimum required balances.

Foreign assets. In many countries, the deposit-money banks hold foreign assets that may be related to their foreign liabilities, may be minimum working balances, or may be effective liquid assets. Where there are such holdings, an entry should be provided for these assets in the projected monetary accounts.

Claims on government. The deposit-money banks in many countries follow definite investment policies that involve the holding of claims on the government. At least in those countries, the record of these holdings of assets is an important element in the structure of the accounts.

Claims on private sector. In most countries, it may be assumed that all the credit to the private sector that is an important part of the projection of the monetary survey is created by the deposit-money banks.

Assets = liabilities. The total of the above components.

Monetary deposits. It may be assumed that all the monetary deposits, the projection of which is one of the key elements in the projection of the monetary survey, are held with the deposit-money banks.

Quasi-monetary deposits. These deposits, the projection of which is made in the monetary survey, may also be assumed to be held with the deposit-money banks.

Borrowing from the central bank. As indicated above, this final entry in the accounts of the monetary system is the key estimate for monetary policy. It may be calculated as a residual in the accounts of the deposit-money banks. If the central bank’s lending is inadequate, the economy will be unlikely to experience its potential. If it is excessive, the country’s international reserves will be depleted, and other signs of inflation will become apparent.

The “commercial bank” account

If identifiable groups of banks are subject to significantly different regulations,30 or if different types of bank engage in markedly different types of business, a set of substatements would probably be useful for the projection of the effects of monetary policy. These statements should be consistent with the consolidated statement for all the deposit-money banks—in fact, they are similar to work sheets that are designed to facilitate the compilation of the consolidated statement.31

One of the commonest examples of the propriety of substatements is to be found in those countries where a part of the community’s assets is held in the form of deposits with the government (usually with the post office). Often, the continuance of post office deposits is a holdover from the period when private banks showed little interest in small personal deposits. In these instances, as post office deposits are likely to grow less rapidly than other deposits, and as their asset counterparts are likely to be different from the assets held against deposits in other banks, a case may be made for separate statements of the post office deposit accounts and the accounts of the other deposit-money banks (here called “commercial banks”), in order to facilitate monetary projections.

Table C.1.

The Commercial Bank Account

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The post office savings bank account

When the government accepts deposits from the private sectors of the community, a separate statement recording these deposits may be appropriate. Usually, this account will be similar in form to the account for the government’s monetary authority operations. In the more common situation, where the government’s deposits are, in effect, incorporated in its general accounts, the balances on deposit account may be recorded in a statistical statement with a “claims on government” counterpart entry. In some instances, the post office, giro, or other receiving agency for government deposits makes loans to the nongovernment sectors as counterparts to its deposit balance. When that occurs, the government’s deposit-accepting activities will require a broader statement, comparable to that for the “commercial” banks.

Table C.2.

Post Office Savings Bank Account

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The Government Account

The government’s financial requirements

As covering the government’s residual financing requirements is one of the responsibilities of the central bank, and, frequently, one of the major constraints on the central bank, a statement of the sources of the government’s requirements originating from factors other than its monetary operations is an essential element in a set of monetary accounts.

As the total amounts of financial assets and liabilities outstanding are important determinants of economic decisions in the economy, monetary statistics are usually based on consolidations of institutional balance sheets rather than on changes in these balance sheets. That is, they usually are stock rather than flow statistics.32 The government’s financial requirement in any period is, however, a flow of finance. Hence, at least one of the government accounting statements should be a receipt and payment account, even if a government balance sheet statement is included in the statistics.

The entries
Government revenue

A reasonable estimate of the government’s receipts other than through borrowing (i.e., direct and indirect taxes, foreign grants,33 transfers, and other receipts) is one of the two foundations for measuring the government’s financial requirements.

Government expenditure

A reasonable estimate of the government’s expenditure on all accounts—current (recurrent and specifically approved) and capital (out of general funds and financed by specific loans)—is the second foundation for measuring the government’s financial requirements.

Deficit (surplus): the government’s financial requirement (not shown in Table D)

The difference between expenditure and revenue is the measure of the government’s over-all financial requirement. This balance may be measured on an accrual (including accounts receivable and payable) basis, or on a cash (limited or actual disbursements and monetary receipts) basis. For different purposes, either of these bases of measurement may be appropriate. If attention is directed to the actual changes in financial assets and liabilities held by members of the community, the cash basis should be adopted.

Table D.

The Government Account

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Other than banks.

Financing from abroad

A measure of both the reasonable and desirable level of government borrowing abroad (and receipts of foreign aid) is an important element in over-all financial planning.

Financing from domestic sources

Use of cash balances. The main sources of government financing are borrowing and utilization (or accumulation) of cash balances. The use of cash balances may be regarded as a cushioning operation relating the government’s over-all financial requirements to its actual borrowing operations.

Borrowing from nonfinancial businesses and from individuals. It may be expected that some part of the government’s financial requirements will be met by net purchases of government obligations by individuals and nonfinancial businesses.34 In most less developed areas, these purchases are likely to be quite small, and any allowance for this source of financing should be based on realistic objective projection of past experience.

Borrowing from financial institutions other than banks. In most countries, financial institutions other than banks (particularly insurance companies and pension funds) hold a certain portion of their assets in the form of government securities.35 Projections, based on past experience, of the demand for the liabilities of these institutions, and of the consequent inflow of funds to them, together with their observed practices with regard to the distribution of their assets, should provide a basis for estimating their demand for government securities.

Borrowing from deposit-money banks. The factors that influence the demands of the deposit-money banks for government securities were considered in the discussion of Table C (pp. 235-39).

Borrowing from the central bank. This residual source of government financing was considered in the discussion of Table B (pp. 231-35).

Other. In addition to its direct financing operations, the government obtains claim to resources from other monetary operations. The profits on seigniorage are the most important of these traditional benefits. It is also possible to include the receipts from monetary authority and other monetary operation under this heading, rather than under the borrowing classification, if this treatment is considered to be appropriate.

The Balance of Payments

A balance of payments statement showing changes in the country’s official international reserves as the concluding entry, or group of entries, is an integral part of the national monetary accounts. The place of the balance of payments in the system of accounts, and its role in the projection of accounts, was considered in the discussion of Tables A and B (pp. 228-35).

Appendix IB. The Compilation of the Consolidated Accounts

The schedules in this appendix identify the entries taken from the subaccounts as presented pro forma in this outline to indicate the compilation of the consolidated accounts.

Schedule 1.

The Monetary Survey

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Schedule 2.

The Monetary Authorities’ Account

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Schedule 3.

The Deposit-Money Bank Account

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Appendix II. A Set of Monetary Relations

The statistical framework outlined here is based on a set of monetary relations that may be expressed in the following symbolic form: 36


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Precisely this formulation may not be applicable in all countries, but a similar formulation is applicable in many countries.

Une étude de la détermination d’une politique de banque centrale


La détermination d’une politique de banque centrale est un processus complexe, qui doit tenir compte des impératifs des secteurs public et privé, tout en visant au maintien de l’équilibre de la balance des paiements et de la stabilité des prix intérieurs. Pour réaliser ces fins, une banque centrale doit disposer d’un ensemble organisé de données statistiques qui lui permette d’évaluer les diverses politiques possibles et de déterminer les niveaux de crédit compatibles avec une croissance optimale de la production et le maintien de l’équilibre économique. Un ensemble de données statistiques organisé d’une manière réaliste, tel l’exemple présenté dans cet article, peut constituer à cet égard un instrument de grande valeur, non seulement dans les pays industrialisés mais également dans les régions de production primaire du monde.

Un marco para la determinación de la política del banco central


El decidir la política del banco central es un proceso complejo en el que hay que compaginar los requisitos de los sectores gubernamental y privado, esforzándose por mantener el equilibrio de la balanza de pagos y la estabilidad de los precios internos. Si han de lograrse esos objetivos, el banco central debe contar con un sistema estadístico organizado que le permita evaluar las alternativas de política y fijar los niveles crediticios que sean consistentes con el máximo crecimiento posible del producto y con el mantenimiento del equilibrio económico. Un conjunto de datos estadísticos organizados de forma realista, tal como se explica en este artículo, puede constituir un poderoso instrumento para el logro de dicho fin, no solamente en los países industrializados sino también en las zonas del mundo dedicadas a la producción primaria.


Mr. Dorrance, an Advisor in the Fund’s Central Banking Service, has served in the Fund’s Research Department as Advisor and as Chief of both the Financial Studies Division and the Statistics Division. Previously he had been with the Bank of Canada and the London School of Economics.


Speech by Governor Rasminsky at the Business Outlook Conference of the National Industrial Conference Board in Toronto, on October 23, 1969.


A statistical framework for one possible system of monetary analysis is outlined in Appendix IA, and a description of one set of possible monetary relations is given in Appendix II.


The Netherlands Bank Act 1948, Article 9(1).


The Central Bank of Kenya Act, 1966, Article 4.


The term “money” is used loosely here, with no attempt at precise definition, to describe all notes and coin in private hands and all deposit liabilities of the banking system to private businesses and individuals.


This group of countries may be considered as being limited to Canada, the Netherlands, New Zealand, Sweden, and the United States, with the possible further inclusion of Australia, Belgium, France, Germany, the United Kingdom, and a few others (see Graeme S. Dorrance, “Inflation and Growth: The Statistical Evidence,” Staff Papers, Vol. XIII (1966), pp. 82-102).


For a discussion of the optimum rate of inflation, see ibid.


The term “deposit-money banks” is used here to comprise those institutions that have major liabilities in the form of demand or similar liabilities or that provide the major part of a community’s effectively and immediately realizable deposit assets. I.e., it includes the commercial banks in most countries and similar institutions irrespective of their names in other countries (e.g., the trading banks in Australia, chartered banks in Canada, commercial and savings banks in Denmark and Norway, credit institutions in Germany, scheduled banks in India, associated banks in Ireland, or specified banks in Kenya).


The poorer members of the community will be likely to hold even their precautionary balances in the form of currency.


For example, in many countries, there is a shift from deposits to currency prior to Christmas or similar festivals.


For a discussion of a central bank’s responsibilities with respect to the maintenance of an optimum level of international reserves, see Graeme S. Dorrance, “The Role of Central Banks in Less Developed Countries,” Finance and Development, Vol. 6 (1969), pp. 23-24.


On the assumption that the responsibility for holding international reserves is vested in the central bank. Where this responsibility lies with an independent institution (e.g., an exchange fund), the central bank’s responsibility to finance the requirements of this institution may be merged with its responsibility to cover the government’s general financial requirements.


The financing of government agencies has been consciously ignored in this article. Allowance for their requirements can easily be made along lines similar to those outlined here for determining the government’s financing requirements.


The problem of consistency in financial projection is clearly illustrated by the origin of one of the first monetary surveys to be developed by national authorities. When the first draft of the 1953 Centraal Economisch Plan was circulated in the Netherlands, President Holtrop of the Netherlands Bank commented that, although the draft contained no monetary data, its monetary implications appeared inconsistent with its price assumptions. The staff of the Planning Bureau was instructed to prepare a monetary analysis indicating the changes in bank credit and consequent changes in community liquidity that would be required to give effect to the Plan. This analysis confirmed President Holtrop’s suspicions; and, since then, the annual statement of the Plan, which has continued to be primarily a national income and expenditure plan, has contained a “monetary survey.”


In some countries, development banks and similar institutions should be subjected to central bank influence.


e.g., in Indonesia, Korea, and Spain.


The presentation outlined here must not be regarded as comprehensive. The analysis that is appropriate for any country is likely to be unique in some particulars. Thus, in many countries, provision will have to be made for items that are not mentioned here. (E.g., it is assumed here that the only domestic liabilities of the central bank are currency and deposits of the government and banks; no provision is made for the issue of central bank bonds and similar liabilities for acquisition by the deposit-money banks and others. Similarly, it is assumed that the only important international monetary liabilities are obligations of the central or other banks; in some countries, these balances are held with the treasury, and the treasury accounts should include an entry for these obligations.)


In these pro forma accounts, illustrative data have been included to facilitate the demonstration of the relations between the different accounts.


The interlocking nature of these relations is exemplified by the effect of a shift of the community’s money holdings between currency and deposits. A shift from deposits to currency will involve an increase in the central bank’s liabilities. For the deposit-money banks, it will involve a decrease in their liabilities that may be partially offset by a decline in their required cash holdings; however, if monetary equilibrium is to be maintained, they must borrow from the central bank an amount equal to the immediate net decrease in their liabilities. This borrowing provides an increase in the assets of the central bank equal to the net increase in its liabilities (increase in currency less decrease in balances due to banks).


In practice, this requirement may be met by setting the cash reserve requirement high enough to force the deposit-money banks to borrow from the central bank.


The problems of accounting adjustments are consciously ignored in this pro forma presentation.


It might be useful if this total were divided between credit to individuals and to businesses. As it is almost always impossible to divide money holdings, particularly currency, into these two categories, it is frequently impossible to derive financial accounts for these two subsectors. Hence, a classification of bank credit alone may be of only marginal value.


In projections, this entry must be calculated on the basis of the liability entries, if claims on the private sector are to be derived as a residual.


E.g., the shifts created by Christmas or other festivals, and the type of shift that may be induced by political uncertainties.


On the assumptions indicated above (see pp. 227-28).


The apportionment of the assets held in the Netherlands by the Ministry of Finance as counterparts to the Government’s liabilities on giro and savings deposits accounts is a somewhat analogous example of fairly arbitrary allocation of the Government’s assets.


Alternatively, they may be considered to be “government deposits” and entered as such in a system of monetary accounts.


In the pro forma tables included here, the illustrative data have been entered on the assumption that the commercial banks are required to hold cash reserves of 10 per cent of their total deposit liabilities, and that they, in fact, hold minimal excess reserves.


In this presentation, it is assumed that the banks are required to hold their cash reserves in the form of central bank deposits, and that their currency holdings are minimal.


Where different banks are subject to only minor differences in regulation (e.g., small differences in reserve requirements based on the location of offices), or tend to specialize to a certain degree in specific types of business (e.g., where some tend to specialize in the financing of international trade, agriculture, etc.), there is unlikely to be a need for a set of substatements.


If there are separate statements for groups of banks, there may be consolidation problems. Conceptually, interbank balances should net to a zero sum in the consolidated statement for the deposit-money banks. In practice, bank debtor and creditor records of interbank balances will be inconsistent (largely as a result of timing differences); the resulting discrepancy can usually be included in the entry for “other items (net).” Groups of banks, however, may have net balances due to or from other groups of banks. Therefore, substatements for groups of deposit-money banks could well include an additional entry (or entries) for “balances due to [from] banks (net).”


The measurement of flows may be approximated from stock statistics, but stock data cannot be derived from flow statistics.


Sometimes it may be appropriate to amalgamate projections of foreign grants in the estimates of foreign borrowing.


It is possible to include such transactions as the accumulation through post office savings deposits and government pension funds under this heading. In most instances, however, it is probably preferable to treat the accumulation of balances with the post office or similar agency and in government pension funds as part of the demand for financial assets, and to classify these funds with “financial institutions other than banks.”


In many cases, these institutions are required by law or regulation to hold a certain portion of their assets in government securities in order to guarantee the liquidity and solvency of their liabilities.


Based on the symbolism used in IFS (see May 1970 issue, p. 2).