high households receive the dividend income from all other sectors. ... neously determined but government is assumed to pay market wages for each skill ... ernment investment, the value of private sector investment is determined by the .... households are assumed to save out of net of tax household cash receipts (wage.
Costs and Bene…ts of Incorporating Asset Markets into CGE Models: Evidence and Design Issues.
Christopher S.Adam and David L.Bevan Centre for the Study of African Economies University of Oxford. August 1998 JEL Codes: C68 , E62, O23.
Abstract This paper discusses how a consistent treatment of asset markets may be integrated into standard trade-focussed CGE models. Starting from a core speci…cation of the real economy, calibrated to data for Zambia in the mid-1990s, the paper examines the properties of a hierarchy of models which di¤er only in the speci…cation of asset markets but subject to a common (negative) temporary …scal shock. Building from a simple ‡ow-model we add further structure to re‡ect broader portfolio choices facing households, …rms and banks, in the context where asset demands may exhibit non-neutrality. This paper was …rst presented at the DIAL / PARADI “Colloque International sur la Modelisation en Equilibre General Calculable en Economie du Developpement”, Paris 4-5 September 1997.
1 Introduction In recent years a number of attempts have been made to integrate money and other …nancial assets into CGE models with the objective of deepening the analysis of macroeconomic adjustment programmes in developing countries. Traditional trade-focussed models, in which allocations are constrained by a relatively narrow range of …scal and trade policy measures, have been augmented through the speci…cation of asset markets and …nancial sector institutions to provide a richer set of policy instruments to analyze, including monetary and exchange rate policies. Although most closely associated with models in the structuralist cash-in-advance tradition (for example Easterly (1990) and Rosensweig and Taylor (1990)), the …nancial CGE approach has also been used in the ‘maquette’models for the analysis of income distribution and adjustment developed by Bourguinon, Branson and de Melo (1989) and by scholars working in the neoclassical tradition such as Lewis’ (1992) work on …nancial liberalization. The principal objective of this class of model has been to analyze the consequences of relaxing the classical assumptions of the neutrality (and superneutrality) of money and assets. This class of model therefore provides for the case where ‡ow equilibria are constrained by the availability (or price) of required …nancial inputs, where the absolute price level matters for resource allocation, and where stock-equilibrium requirements constrain agents’portfolio decisions. The key question is whether these constraints are su¢ cient to alter the qualitative results emerging from an unconstrained model. Extending the research agenda in this fashion does not, however, garner universal support. Even though nominal rigidities and the performance of asset markets do appear to have signi…cant real e¤ects for developing countries through their consequences for the distribution of income and wealth, the transmission of …scal and monetary policy to the real economy, and their impact on savings and investment, there remains a scepticism about the bene…ts of incorporating asset markets in CGE models. For example, Ginsburg and Keyser’s (1997) excellent text on the structure of applied general equilibrium models devotes only one short chapter to the question of modelling asset markets. Robinson (1991), discussing the OECD Development Centre’s work using …nancial CGEs, is more forthright in expressing his reservations about the value of …nancial CGE models. Such models may indeed add richness to the speci…cation, he argues, but “the theoretical tension between the neoclassical paradigm and structuralist models is clearly evident [in …nancial CGEs], and some of the speci…cations are still controversial....we are still far from a theoretical reconciliation between Walras and Keynes, and empirical models cannot help but re‡ect the theoretical gap” [p1522]. Implicit in this critique is the view that because of inherent weaknesses in …nancial CGE models, particularly in areas such as the treatment of expectations, dynamic consistency, and multiple-equilibria, it is questionable whether attempts to develop …nancial CGE models may pass the relevant cost-bene…t tests. Moreover, he argues, “a great deal of interesting macroeconomic behaviour can be captured in a model with no money or assets”. There are two rejoinders to this view.1 The …rst is that it begs the question of 1 Apart from the concern that this view risks placing the best as the enemy of the good, encouraging an excessively purist approach to what is a branch of applied economics.
1
what one regards as “interesting macroeconomic behaviour”. It is certainly true that a wide range of questions can be addressed using a real economy mode, but there are many which can not. The second is that the world is in fact characterized by asset markets and non-homogeneities, and the “sins of omission” from suppressing these e¤ects may be more serious than the “sins of commission” arising from imperfect attempts at integrating these macroeconomic features into Walrasian structures. One way of casting some light on this debate is through simple experimentation. In this paper we use a conventional trade-focussed CGE model calibrated for a low-income, commodity-dependent economy, to compare the characteristics of the economy’s response to a very simple …scal shock implemented under di¤erent speci…cations of the model. The shock is a temporary shift from a balanced budget into a …scal de…cit induced by an increase in public sector employment. This initial shock lasts for two years and is then reversed. While it is in force, it is su¢ cient to induce a budget de…cit equal to around 2% of GDP. The detailed alternative speci…cations of the model are discussed later in the paper, but the basic scheme is designed to provide a hierarchy, with progressively more attention paid to asset considerations. Since the core structure of all three versions is identical, we can be con…dent that any di¤erences in the simulated behaviour of the economy is due entirely to these di¤erent treatment of assets. There are four distinct versions of the model. The …rst is a standard realeconomy formalization in the “1-2-3”tradition (the ‘real economy model’). Here there is no explicit mechanism for …nancing the de…cit, which is portrayed (as is conventional in this type of model) simply as driving a wedge between private savings and investment; the real consequences of this wedge then depend on the form of ‘macroeconomic closure’chosen, that is whether the adjustment is driven primarily from the investment side, or primarily from the saving side. We consider both the case where the de…cit has no debt service consequences a proxy for monetization - and the case where the government has to borrow, but faces an elastic supply of funds. In both cases, the longer run consequences of the temporary shock are very muted. The second version (the ‘basic portfolio model’) incorporates stock and portfolio considerations in the most minimal way, by introducing a choice over corporate equity and government debt. This complicates the story in two ways. First, it means that the government faces a rising cost of funds as it increases the share of debt in the private portfolio. Second, this substitution also feeds back onto the cost of capital and hence the desire to invest in real capital. The strength of these e¤ects depends on how close substitutes the two assets are for each other. However, even for a relatively high degree of substitutability, the additional impact of the shock on the real economy is quite marked. The third version (the ‘extended portfolio model’) builds on its predecessor by introducing a non-homogeneous, in‡ation-sensitive currency demand function. This extends the model in two ways. First by introducing one nonneutrality through the demand for currency, it creates a basic macro-economic link in the model, and secondly it introduces the necessity of specifying how the budget de…cit is to be …nanced, which has further implications for interest rates, in‡ation and the nominal exchange rate. Additionally, having introduced a non-neutral currency demand function, this version of the model requires us to confront the question of how agents form in‡ation expectations. The …nal version (the ‘asset market model’) augments the extended portfolio 2
model with a fully speci…ed set of asset markets and a banking sector which intermediates household savings and …rm’s capital requirements. In addition to a richer variety of portfolio e¤ects, this version also confronts …rms with recurrent …nancing requirements (mirroring households’cash-in-advance constraints) and also provides for a more extensive menu of policy instruments by confronting the banking sector with quantitative reserve requirements. The asset market model therefore provides the minimum structure required to analyse the conventional package of monetary, exchange rate and …scal policy measures available to the authorities in low-income developing countries. The remainder of the paper is structured as follows. Section 2 provides a brief description of the three versions of the model. Section 3 then presents the simulation evidence, illustrating behaviour under the trial shock. Section 4 o¤ers a more extended discussion of the types of modelling issues that are raised by this type of exercise, and Section 5 concludes.
2
Model Speci…cation
In order to isolate the speci…c role of asset markets in in‡uencing the behaviour of the economy our hierarchy of models shares a common and extremely simple real-economy structure based on a competitive, ‡exible price small open economy with full employment. The economy consists of four productive sectors, three household types, and a government sector. The numeraire is the world price of imports. In this section we provide a brief description of the three models. A full listing of the three models is contained in Appendices IA and IB, to which all equation numbers in this section also refer, while a brief description of the database used is contained in Appendix II.
2.1
The Real Economy Model
Production and Consumption The goods market speci…cation is relatively standard and closely follows the “1-2-3”class of models for developing countries discussed at length by Devarajan et al (1998). All domestic goods and factor prices are ‡exible [see equations A1 to A11]. Firms, which are assumed to be perfectly competitive, produce a homogeneous output which can either be sold domestically (as …nal or intermediate consumption) or exported, with the composition of output determined by a constant elasticity of transformation function [A15 and A17]. They are also assumed to be price takers for all imports. Firms in the dominant exportable sector, mining, are assumed to have some market power: world demand for mining sector exports is therefore assumed to be less than in…nitely elastic [A16]. Consumption is assumed to be regulated by the Armington assumption of imperfect substitution between domestic and imported goods, although it is assumed that, for quality or technical reasons, …rms are less able than consumers to switch sources of supply from imports to domestic production [A18-A21].2 Gross output is determined by a …xed-coe¢ cients Leontief production structure between intermediate inputs and value added [A6 and A22], with value added being determined by Cobb-Douglas production functions for all sectors 2 The baseline model assumes that in general substitution elasticities for intermediate consumption are half those for …nal consumption.
3
of the economy [A12].3 Production requires sector-speci…c private capital (…xed in the short run) and up to three types of labour (rural unskilled labour, urban unskilled labour, and skilled labour). Private sector output is also in‡uenced by the level of publicly provided infrastructure. We assume that the government produces two forms of capital: a ‘sector-speci…c’ capital good which is required only for the production of government services (such as government o¢ ces etc.); and ‘public good’capital (for example infrastructure). The latter enters the production function of all private sector …rms non-rivalrously. Household Income and Demand The model distinguishes three domestic household types denoted rural, low, and high. The household types are identi…ed principally in terms of the type of labour they supply to the economy. Thus rural households supply unskilled labour to the agricultural sector only, low households supply unskilled labour to the non-agricultural sector of the economy, and high households supply skilled labour to all sectors of the economy. The representative household supplies labour of its skill-type to the productive sector of the economy in proportion to the sectoral distribution of labour demand, thereby ruling out both skill-diversi…ed households, and sectorally speci…c households (for example, households only supplying labour to the mining sector). Gross household ‘cash income’ consists of labour incomes, transfers from government, remittances from overseas plus (in the case of high households only) interest on public debt [A93-A95]. In addition, households also receive income from capital in the form of distributed pro…ts (referred to as dividends) from …rms. Rural households are assumed to be owners of the capital in the agricultural sector and receive dividend income from agricultural …rms [A43]. Low households supply only labour and receive no dividend income while the high households receive the dividend income from all other sectors. Households are assumed to make savings decisions out of ‘cash income’ only and to fully consume dividend income [A53-A55].Income net of taxation and saving is consumed according to a constant elasticity of substitution (CES) linear expenditure system [A23]. Labour Markets In the current version of the model, we adopt the approach popularized by Condon, Dahl and Devarajan (1987). With …xed skill-speci…c labour supply, full employment, and pro…t maximizing private …rms, the wage for each skill type is driven towards the value of its marginal product in the sector [A13].4 However, in order to re‡ect the observed sectoral wage distributions observed in the baseline calibration, sector-speci…c wage rates are not equalized across sectors (for a given skill type) but are distributed around the mean wage for each skill type according to the distribution matrix ip;lc so that sector speci…c wages are de…ned as wip;lc = ip;lc walc . The distribution matrix can be 3 Since mining output is only partially determined by capital and labour inputs, the CobbDouglas speci…cation is dropped for the mining sector. In the absence of data on the …xed factors (ie some measure of the geology of the orebody), we let the quantity of labour as well as capital in the sector be exogenously determined in the short-run. This ties down the output of the sector in the short run, ensuring that the rate of mining extraction cannot be adjusted in response to output price changes. 4 The public sector is not modelled as an optimizing institution. Labour demand is exogeneously determined but government is assumed to pay market wages for each skill type.
4
thought of as re‡ecting constraints to full labour market clearing arising from, say, union power in certain sectors or other structural features. These rigidities are …xed through time. Government Aside from a relatively standard structure of taxation [A27A32], government behaviour impacts on the private sector in four ways. First, as discussed above, there is a public good element to government capital formation which directly augments private sector productivity. Second, the government’s current output is modelled as a public good. The production of this good requires labour and intermediate goods [A7], but this output is not paid for at the point of consumption. To avoid the situation where a reduction in recurrent government expenditure generally has no adverse direct welfare consequences we allow government current consumption (for example on health and education) to enter directly the household utility function [A87]. The third channel is via the budget de…cit. In the case of the real model and the basic portfolio model, it is assumed that the government de…cit (net of aid in‡ows and the drawdown of net foreign assets) is entirely debt …nanced [A96], where the government faces a …xed interest rate on its debt. In the case of the asset market model the authorities are assumed to chose whether to bond-…nance or money-…nance the domestic budget de…cit (see below). Finally, when there are time lags in the collection of taxes, the real value or revenue receipts will decline in the face of in‡ation, the so-called ‘Olivera-Tanzi’e¤ect. In order to capture this e¤ect, we have modi…ed the direct tax equation [A32] to allow for sluggish revenue collection where is the average lag in collections.5 The Real Model Closure and Calibration The real model is recursively dynamic in the sense that the capital stock and labour supply are updated between periods and can be run under alternative closure rules. We consider two closures, a neo-classical (savings determined) closure and a Kaldorian (investment determined) closure. Both are arbitrary but imply signi…cantly di¤erent adjustment to the same shocks. Under the neo-classical closure, with …xed government investment, the value of private sector investment is determined by the value of net domestic savings plus foreign savings (referred to in these models as ‘aid’), regardless of the ex ante return on capital [A90]. Private sector savings are determined endogenously as the outcome of the income generating process and a …xed savings propensity, while government saving is determined via the ‡ow of revenue and an exogenously determined volume of government expenditure. Foreign savings are exogenous. Within the private sector, the sectoral allocation of the given volume of aggregate private investment is return-sensitive [A88 and A89] The Kaldorian closure substitutes this mechanism by a return-sensitive investment function[A91]. Given a baseline real rate of return, aggregate private investment increases or decreases as a function of the di¤erential between the current period return to capital and the average return to capital established in the baseline calibration. Given government and foreign savings, the savings investment equilibrium [A90] is satis…ed through endogenous changes in the 5 This treatment can readily be extended to other revenue sources, and indeed, while much early discussion of the Oliveira-Tanzi e¤ect focussed on the direct taxes, subsequent research suggests that the e¤ect is relatively uniform across tax types.
5
high-income household’s propensity to save. The calibration parameters of the common core model are …xed throughout all the experiments and are based on parameter values used by other researchers employing the same “1-2-3” class of model. They are taken to re‡ect a broad consensus in the literature on low- to middle-income developing countries.
2.2
The Basic Portfolio Model
The basic portfolio model represents the simplest speci…cation which allows portfolio-choice decisions to constrain the economy’s behaviour. This model is identical to the (Kaldorian) real economy model except that the wealth of the high household is now introduced explicitly into the model, albeit in a partial manner. Wealth consists of claims against both the private productive sector and the government but the household is not indi¤erent to the composition of its wealth portfolio. The portfolio choice over the stock of government debt (GBR) and corporate equity (KEQT ) is characterized in terms of a CES function of the form Uh = ['p (1 + rrg)GBR1
1= p
+ (1
'p )(1 + rr)KEQT 1
1= p
]
1=(1 1= p)
(1)
where'p is the share parameter and p the elasticity of substitution. Conditional on total household wealth (N HW ) this leads to the portfolio choice equation [A98]. In practice since GBR, KEQT , and rr are determined elsewhere in the model, equation [A98] can be thought of a de…ning the price, rrg , (relative to rr) at which the private sector is willing to hold the stock of government debt. In this model, rrg is assumed to represent the marginal cost of capital facing …rms price of funds [A92]. This basic portfolio structure therefore allows for the evolution of the public debt to in‡uence the real economy via household portfolio choices. Nonetheless the feedback mechanism remains rudimentary and, as shall be seen in the next section, is governed by the single parameter, p . The fully speci…ed asset market model, presented in section 2.4 o¤ers a speci…cation which extends this basic portfolio mechanism by introducing a broader range of …nancial assets and liabilities by introducing a banking sector. In doing so, however, the full asset model also introduces non-homogeneous asset demand functions. Since both aspects (the banking sector and the non-homogeneous asset demands) may have potentially important e¤ects, we move to the full asset market model in two stages.
2.3
The Extended Portfolio Model
The extended portfolio model maintains the simplifying assumption that no banking sector is required to intermediate household to …rm …nancial ‡ows, but it does allow for governments to issue currency. It therefore builds on the basic portfolio model by assuming that all households face a cash-in-advance constraint requiring them to hold non-interest bearing currency. However households are able to economize on their currency requirements so that their currency demand depends on the expected rate of in‡ation [A59 and A60]. Changes in currency demand represent a prior claim on household savings. Currency is
6
supplied according to one or other of the de…cit …nancing rules. The monetary authorities in this model are responsible for the choice of exchange rate regime and the setting of monetary policy. The central bank’s assets consist of the economy’s o¢ cial net foreign assets and claims against the government, and these are matched by the currency supply and government securities. The central bank (on behalf of government) has the capacity to choose both the nominal exchange rate regime and the composition of the domestic …nancing of the budget de…cit between sales of government securities and the issue of currency. We allow for a variety of policy choices. The nominal exchange rate can be …xed, free-‡oating or managed under alternative dirty-‡oating regimes.6 We consider two de…cit …nancing rules. The …rst determines the composition of de…cit …nancing so that any increase or decrease in the budget net of aid and the drawdown of foreign reserves is …nanced equi-proportionally by changes in debt and the currency supply which leaves the composition of the central bank’s liabilities unchanged [A83]. The parameter is a choice variable of the modeller. The alternative is to specify explicit currency supply (or debt) rules, thereby delegating the residual de…cit …nancing to the other source. For example we examine error-correction currency supply rules of the form = p0 p1 1 where is the growth rate of the currency supply and p1 > 0 [A84].
2.4
The Model with Asset Markets
The full asset market model deviates from the real economy model in three main respects. First, the model includes a detailed speci…cation the …nancial asset markets and institutions (the banking sector and central bank) that exist to intermediate current and capital account resource ‡ows between households and …rms, and between the public and private sectors. Secondly, the asset market model combines the ‡ow equilibrium constraints of the real model with fully articulated stock constraints de…ned by the portfolio choices of households, …rms, banks and the monetary authorities.7 Finally, as with the extended portfolio model, the asset market model introduces an explicit set of policy rules governing the nominal exchange rate and the …nancing of the government’s domestic budget balance. Savings and Investment The treatment of savings and investment in the asset market model represents an attempt to avoid the arbitrariness of the macroeconomic closure rules that appears in real economy model where either the savings function or the investment function were independent, but not both. In the asset market model …rms’ investment function, and household savings behaviour are independent, with the implication that, conditional on the structure of the …nancial sector institutions, the asset market model de…nes a vector of asset prices which supports the savings-investment equilibrium. 6 It is also possible in both cases for the authorities to operate a dual exchange rate regime in which a parallel market exists to clear the foreign exchange market. This simply requires the modeller to specify the set of rules determining the evolution of the o¢ cial rate and which transactions are carried out at this o¢ cial rate. The parallel market rate and exchange rate premium are therefore determined endogeneously while the quasi-rents from the parallel market accrue to government in the form of additional de…cit …nancing. 7 The government’s own balance sheet constraint does not constrain the model.
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The net investment rate for each sector is de…ned according to a neo-classical cost-of-capital model [A37]. The …rst term, ( ip + kip ) is a constant where kip measures unobserved sector-speci…c factors (such as uncertainty), while the second term measures the responsiveness of the sector-speci…c investment rate to the di¤erential between the current real rate of return on the investment and the real cost of capital, which is de…ned below. Given the calibration data used for this model the constant of investment is negative for all sectors implying a positive interest rate di¤erential in the steady-state.8 In addition to accumulating …xed assets, …rms also require current assets, in the form of working capital balances, to …nance labour costs and the cost of intermediate inputs during the production process [A49]. Required working capital balances are assumed to be a …xed share of the wage bill and cost of intermediate goods, and are held as non-interest bearing call deposits with the banking sector. Firms can …nance the ‡ow of investment and the change in working capital requirements from two sources, credit from the banking system and equity from the household sector [A41]. The marginal cost of raising funds from these sources are the households return on …nancial assets (rm ) in the case of equity and the bank lending rate (rc )in the case of bank credit. Firms choose their capital gearing (i.e. the debt to equity ratio) so as to minimize their overall risk-adjusted cost of capital [A47]. While it makes sense that …rms choose the composition of their investment …nancing on the margin in terms of their overall capital gearing, it remains the case that in reality …rms cannot shift costlessly between equity and debt. We therefore assume that debt and equity are imperfect substitutes on the …rms balance sheet, where the imperfect substitutability re‡ects factors not explicitly modelled. In these circumstances, …rm i’s gearing decision can be characterized as the outcome of the minimization of a CES cost function of the form: 1 1=
Ui = ['si (1 + rc )DCPip
si
+ (1
1 1=
'si )(1 + rm )KEQip
si
]
1=(1 1=
si )
(2)
where si is the elasticity of substitution between debt (DCP ) and equity (KEQ). This CES function generates the optimal portfolio choice given the rates of return rc and rm [A46]. The speci…cation of the within-period cost of capital as (1 + r) re‡ects the assumption that the investor (in this case the household or bank) is able to liquidate the full capital value of the asset at the end of the period: the one-period cost to the …rm is then de…ned in terms of the gross investment yield over the period. If, on the other hand, the investment was irreversible, the one-period return to the asset would be r: 9 8 The gap between the marginal and average return elasticity of investment can be moderated or accentuated through changes in the exogenously determined parameter kip. 9 We could introduce an additional parameter to this cost function (or, to the household or bank investment decisions encountered below) and de…ne the return to the asset as (A + r), where 0 6 A 6 1. As A rises the investors utility is less sensitive to changes in the current interest rate. In e¤ect, this parameter A proxies for the investor’s di¢ culties in rebalancing his portfolio at short notice, whether due to transactions costs or partial irreversibility, relative to the expected gains from doing so. For example, widely diverging current returns on assets may be consistent with sluggish portfolio response if these returns are believed to be poor indicators of future returns and switching is costly; however they would eventually lead to large responses if the divergences remained. Taylor and Rosensweig (1990) adopt a similar speci…cation by de…ning the return from holding each asset as rc X where rc = rr and r is de…ned (exogenously) to be the ‘normal’or long run rate of return to the asset X.
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The value of a …rms’ equity is de…ned in terms of a simple asset pricing model [A42] which values the …rm’s equity as the discounted value of current pro…ts where roe de…nes the average return on the economy-wide equity portfolio and qip represent sector-speci…c beta coe¢ cients from the implicit CAPM model. This mechanism for determining the …nancing of a …rm’s investment thus residually de…nes the dividend accruing to households who hold the equity in the …rms.10 It is assumed that all …rms in the agricultural sector are held by the rural households and that all other …rms are owned by the high income urban households [A43 and A44]. Household Income, Saving and Portfolio Choices. As in the real model households are assumed to save out of net of tax household cash receipts (wage income, transfers, remittances, interest income) only [A53]. This savings decision is a positive function of the real interest rate on …nancial assets [A54]. It is assumed that their propensity to consume out of dividend income is unity (re‡ecting the fact that …rms have already allocated the gross pro…t income between saving (i.e. equity injections) and consumption.11 However in the asset market version of the model, the three household classi…cation does embody different asset portfolio characteristics across the households, which re‡ect deeper di¤erences in households’access to certain forms of assets The evolution of household wealth is determined both by the direct ‡ow of savings out of income, but is also augmented, where relevant, by changes in the value of equity holdings and by gains or losses on foreign assets arising from exchange rate movements.[A56 - A58] This stock of net wealth is then allocated by households across a range of …nancial assets depending on the portfolio options they face. As in the extended portfolio model, all households have a currency requirement de…ned by an in‡ation sensitive demand function which represents a prior claim on household savings [A59 and A60] The balance is then allocated across the remaining assets in the portfolio according to the household type. The two low-income households (rural and low )maintain simple and undiversi…ed …nancial asset portfolios. Net of their required currency balances, these households hold only deposits with the domestic banking sector [A61]. For high income households their …nancial wealth net of currency is allocated between deposits with the domestic banking sector and deposits held o¤shore (foreign deposits). As with …rms’ gearing decision, we assume that domestic and foreign deposits are imperfect substitutes and that the portfolio allocation rule is characterized by a constant elasticity of substitution (sub)utility function of the form: Ud = [ [(1 + rrd )DD]1
1= f
+ (1
)[(1 + rrx +
1 1= f 1=(1 1= f ) ] f )er:F D]
(3)
where DD denotes domestic deposits, F D foreign deposits, and er the current exchange rate. The real rates of return to domestic and foreign deposits 1 0 The accounting of …nancial ‡ows in the model assumes that …rms retain pro…ts in the …rst instance so that the equity injection (and hence gross dividend rate) is determined by the …rm in the light of its investment decision. 1 1 In the present version of the model, we do not separately identify the capital value and pure dividend yield components of the ‡ow of funds from …rms to households.
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are denoted by rrd and rrx respectively, f is a measure of the (exogenous) premium on foreign assets, while f is the elasticity of substitution between domestic and foreign assets. As we show in the next section, the presence of this type of dollarization / currency substitution has powerful e¤ects on the behaviour of the model. In addition to analysing the model as speci…ed here we also examine a speci…cation where it is assumed that there is no currency substitution. Given total deposits [A63], the maximization of this function yields the household’s demand for domestic deposits[A64]. Together with …rms’working capital balances constitutes the balance sheet of the banking sector. The Banking System The equity ‡ow from households to …rms is assumed to occur behind the corporate veil: by contrast deposits from households and …rms are converted into credit to …rms (and government) by the banking sector. Commercial banks operate exclusively in local currency, taking deposits (from …rms and households) and allocating their discretionary loanable funds between claims on the private sector and claims on the government[A74 and A78]. The banks are subject to a minimum liquid asset requirement [A70] which, given a predetermined stock of government debt may require them to hold cash reserves with the central bank in excess of their desired operation level [A71 - A73]. The allocation of loanable funds between (interest bearing) claims on the government and claims on the private sector is determined according to a similar process as that governing the allocation of household deposits, namely that credit to …rms is an imperfect substitute for credit to the government so that the allocation is again governed by a CES allocation function [A74 and A75]. There is no explicit optimizing structure for the banking sector; as a consequence we therefore assume that banks earn a mark-up over their cost of funds. We specify this mark up in terms of a weighted average of the nominal mark-up and a …xed constant real return on assets. This allows bank pro…ts to move pro-cyclically with interest rate spreads, but, through choice of the weight 2 deviations in the pro…t rate from the baseline value bp can be reduced. In the limit as 2 = 0, we assume that the mark-up ensures a constant return on assets [A76]. Banks’ income accrues in its entirety to the skilled households [A77]. The Monetary Authorities and Macroeconomic Policy Rules As with the extended portfolio model, the authorities are responsible for the choice of nominal exchange rate regime and the setting of monetary policy through the de…cit …nancing rules. In addition to direct monetary policy instruments, the authorities also have the capacity to impose reserve or liquidity requirements on the banking sector. This requires the banking sector to hold a minimum quantity of its asset portfolio in the form of liquid assets (either government securities or reserves with the central bank). Since the models we examine here are fully deterministic, the reserve requirement ful…lls no precautionary role but is instead a simple distortionary tax instrument. Assuming that the reserve requirements exceeds the prudential or operational demand for reserves held by the banking sector, the reserve requirement places a ‡oor beneath real money demand in the economy. In the face of in‡ationary pressures then, declines in the demand for currency by the private sector may be o¤set by an increase in the required currency demand of the banking sector.
10
Dynamic Speci…cation and Expectations As noted above, although the introduction of asset markets o¤ers an apparent solution to the closure problems confronted by static real models, this is at the cost of unrealistic assumptions about dynamic speci…cation and the treatment of expectations of rates of return on …nancial assets. The model presented in this section shares a number of these features. It is strictly recursive. At the beginning of each period agents inherit real stocks of physical capital and nominal stocks of …nancial assets and are assumed to know the history of in‡ation. These stocks are updated by …rms, households and banks according to their investment and portfolio allocation rules. However, with the exception of household’s money demand function, in which expected in‡ation is modelled as following an adaptive/extrapolative expectations rule, all other investment decisions are myopic, based solely on the current prevailing rate of return on di¤erent assets, although as noted above, we seek to proxy longer investment horizons in the portfolio allocation rules by de…ning the expected returns as (1 + r)X where r is the rate of return, X is the asset stock Summary and Asset Market Calibration The asset market model is thus characterized by three portfolio choices and three corresponding balance sheet constraints (in addition to the investment …nancing ‡ow constraints noted above). The …rst derives from the …rms’gearing decision [A6] and balance sheet [A43].12 The second key constraint is the high-income household’s portfolio constraint [A62] which determines the size of the domestic deposit base, and the third is the banks’loanable funds decision [A75] and balance sheet [A78] which, in conjunction with the banking sector’s mark-up rule, determine the cost of credit to government and the private sector. These three portfolio constraints play a key role in the functioning of the asset market model. However, in contrast to the calibration values for the real economy model, the absence of work on portfolio models means that we lack a solid foundation upon which to base our choice of parameter values for the asset market structures. With the exception of the parameters of currency demand, they are not grounded in the literature or econometric estimation. As such they are choice parameters of the experiments reported in the remainder of the paper. Broadly speaking, however, the key parameters in this set fall into two sets: the …rst concerns the ease with which agents can alter their asset portfolios. Thus f measures households’elasticity of asset substitution between domestic and foreign deposits; L measures the ease with which banks can substitute credit to the private sector for credit to government, and s measures the ease of substitution between equity and debt in …rms …nancing. The …nal parameter concerns in‡ation expectations. For both the extended portfolio model and the full asset market model we de…ne in‡ation expectations according to two rules [A60a] and [A60b]. Under the former, expectations are formed as e
= (1 + )
1
e 1
(4)
where 1 6 6 1 measures the responsiveness of current in‡ation expectations. When < 0 expectations are adaptive (at = 1 , they are static). At = 0 the model delivers unit elastic expectations, while with > 0 agents 1 2 Note that since …rms’goodwill does not re-enter the model, this balance sheet constraint does not impact on the behaviour of the model.
11
form their expectations extrapolatively. The second alternative is to assume that agents can observe the growth of the money supply and form their expectations based solely on this. Hence e
=
CU S CU S 1
(5)
Table 1 reports the parameter values used in the experiments reported in the following section. Model All
Table 1: Behavioural and Policy Parameters Parameter Description cci cpi ti
Basic Portfolio Ext’d & Full
p 1 2
Full
s f l 2
3
H’hold elasticity of substitution in consumption Firm elasticity of substitution in consumption Firm elasticity of transformation in production Investment responsiveness parameter Household portfolio substitution Income elasticity of currency demand In‡ation semi-elasticity of currency demand Olivera-Tanzi parameter In‡ation expectations parameter Firm’s capital gearing parameter Household portfolio substitution Banks lending portfolio substitution Banks’mark-up parameter
Comparative Model Simulations
Having sketched the models, we now examine their comparative performance. One of the consequences of adding asset markets to the standard model is that we signi…cantly increase the number of choice parameters, vastly increasing the potential experiment space. It is neither possible nor desirable to provide here a detailed assessment of the properties of the asset market model, which would require very extensive sensitivity analysis. In the present paper, we wish only to illustrate to what extent and in what way the results generated by the models may di¤er when they are exposed to the same type of macroeconomic shock. Hence we restrict ourselves to a partial comparison of the models evaluated over a single simple experiment, with a restricted set of parameter values. Since we wish to examine the potential gains from the richer model speci…cation in studying macroeconomic issues, the simplest experiment is one which starts from a balanced budget, and temporarily induces a budget de…cit by raising government current spending through a temporary expansion in the number of public employees. Speci…cally we assume government increases its employment level by 15% (across both skill types) for a period of two years, reverting to the baseline employment level in year three. The question is how this de…cit is covered. In exercises using real CGE models, this issue is often either avoided entirely, by restricting attention to balanced budget changes (for example revenue neutral tax reforms); or it is treated in a relatively cavalier fashion, where the increase in the budget de…cit is treated as a direct call on private savings, without any 12
Experiment Value 0:75 0:25 0:75 0:25 3:0 to 50:0 1:00 1:5 or 5:0 0:50 0:5 5:0 5:0 25:0 1:0 to 0:0
mechanism being speci…ed for achieving this substitution. In consequence, a rise in the budget de…cit has the impact e¤ect of crowding out private activity, with the component that is crowded out depending on the choice of ‘closure’ adopted, but it has no cumulative consequences. In particular, it is treated as a redirection of current ‡ows, which may have consequences for the evolution of the aggregate private capital stock, but not for the stock of public debt, or for future government debt service. Outside of a one-period setting, this could only be rationalized by claiming that the government was able to preempt the additional resources by monetizing the de…cit, i.e. by in‡ationary …nance. However, in the context of a real model, this would require a very strong type of neutrality, so that the set of outputs and relative prices are invariant to the changed evolution of the price level. By contrast, the …nancing of the de…cit is dealt with very explicitly in the asset market model. Here it is necessary to specify the government’s …nancing rule, i.e. how much of the de…cit it elects to cover by issuing interest bearing securities, and how much to monetize.. The issue of additional interest bearing government debt requires shifts in the private sector’s asset portfolio and hence in the level and structure of interest rates, with consequences for the real economy. On the other hand, increasing the money supply will have in‡ationary e¤ects, and, given non-neutralities, this will also have consequences for the real economy. Given the scale of this discrepancy of treatment, it is no surprise that a comparison between the ‘interest free’ …nance version of the real CGE model and the fully-‡edged asset market model shows major di¤erences in responses to macroeconomic shocks. However, it could reasonably be argued that the real CGE model could incorporate a rather more realistic portrayal of …nancing issues than the ‘interest free’case without it being necessary to go to the considerable extra labour of fully specifying asset markets. We consider three possible intermediate versions. In the most limited version, we assume that the government …nances the de…cit by borrowing at some real interest rate, but that the demand for government securities is elastic at that rate. Hence a de…cit does incur debt service costs in the future, but there are no portfolio e¤ects connected with shifts in the associated composition of privately held assets. One possible rationale for this assumption would be Ricardian equivalence. In the intermediate version we assume that there is indeed limited substitutability between government debt and other assets, so that protracted de…cit …nancing incurs an increasing cost of funds to both the public and private sectors. Since this extension does involve some explicit consideration of asset markets, however rudimentary, we distinguish it from the real model by terming it the basic portfolio model. In the third intermediate step, we give the authorities an additional de…cit …nancing tool, namely money creation. This is the extended portfolio model. Thus we have four classes of model to consider, one comprising the standard real CGE model, two variants of a rudimentary portfolio model and the full asset market model itself. The question is how much of the gain associated with the full model can be acquired more cheaply by reinforcing, to various degrees, the …nancing assumptions in the simpler models. Macroeconomic features are often considered to have been incorporated into real models by the choice of closure rules. Hence for the real models we also examine the consequences of the experiment under two di¤erent closure rules, the neo-classical closure in which aggregate investment is constrained by sav13
ings, and the Kaldorian closure where savings adjust to satisfy the independent aggregate investment demand. In all cases, we assume full employment in the labour market and take as numeraire the world price of imports (pw m ) so that all constant-price measures represent the value of the aggregate in units of imports. For the real and basic portfolio models the nominal exchange rate is …xed, so that in the absence of changes in tari¤ and duty rates, the domestic prices of imports (pm ) remain constant throughout the experiments. Since the economy is assumed to have market power in the mining sector, world and domestic export prices are constant only for the non-mining export sectors (agriculture and manufactures). For convenience, since our experiments do not alter the world or domestic terms of trade ER 13 ( ppme ), we report only a single real exchange rate de…ned as RER = CP I:
3.1
The Real Economy Model
The results of the real-economy experiments are summarized in Tables 2 and 3. Given the focus of this paper we restrict our attention to the principal macroeconomic results, in particular the evolution of prices, aggregate output and investment, the government budget, the current account balance and household welfare. We do not report the consequences of the shocks for intra-sectoral resource allocation or household income distribution. 3.1.1
‘Interest Free’
In the case considered, the choice of closure has important consequences for the path of private investment, with this falling much more sharply under the neoclassical closure (as is to be expected). The macroeconomic consequences of the shock are very similar however. In each case, the government de…cit rises to around 2% of GDP for the two shock years, and then nearly recovers to balance immediately thereafter. The real exchange rate appreciates by about 3.5% for the two shock years, and then recovers most of the way to its pre-shock level. 3.1.2
Fixed Interest
The same pattern is repeated in most respects. The di¤erence is that the cumulative de…cit of 4% or so of GDP during the shock years now leaves a residual …nancing problem behind. Since the experiment makes no …scal correction for this, the government now runs a small but growing de…cit and debt climbs steadily (up by about 10% of GDP over 25 years). The e¤ects of incorporating interest are muted, partly because the cumulative primary de…cit is small, partly because the interest rate paid by government is modest, and partly because there is no feedback onto the private sector’s cost of capital. In this model the real economy is almost completely insulated from the (growing) …scal disequilibrium. 1 3 Obviously
this simpli…cation is not possible if we were to examine the consequences of changes in the world terms of trade or in domestic trade policy.
14
3.2
The Basic Portfolio Model
The basic portfolio model incorporates a Kaldorian closure and we therefore focus our attention on the e¤ect of varying the elasticity of substitution in private portfolios between public debt and private assets. Results are presented in Table 4, with the elasticity ranging from the very high value of 50 down to 5. In this model, even when the substitution elasticity is very high, implying that households are almost indi¤erent between holding public or private debt, there is a gradual upward drift in the real cost of capital as the households wealth portfolio shifts increasingly towards public debt. This rise in the real cost of capital squeezes the marginal return to private investment which falls by some 6.5% over the long-run (relative to the …xed interest case in Table 3). This contributes to a reduction in GDP of around 0.75% and a long-run welfare reduction (compared to the …xed interest case where welfare was unchanged). With lower GDP and a rising bond rate, the public debt ratio rises to almost 22% of GDP at the end of 20 periods, some two percentage points higher than in the …xed interest case. Lowering the elasticity to 10, which is still high, we begin to observe very substantial changes. The bond rate doubles to 6% by the second year of the shock, and the residual …nancing problem begins to escalate after the end of the shock, with the bond rate, the de…cit and public debt all beginning to grow very rapidly. The resulting squeeze on the return to investment induces a precipitous decline in investment which is down by 12% by the end of the shock period, and by almost 40% by year 10. The cumulative e¤ect on output is now quite marked. While the initial …scal expansion reduces private GDP by putting upward pressure on real wages (hence the short run welfare gains) this is substantially clawed-back in year three when public employees are released into the private sector. However, and in contrast to the real-economy models, the private sector output recovery is short lived as the declining investment rate reduces the capital stock and hence the productivity of labour. With an elasticity of 5, the higher de…cit during the …scal expansion means that even with the end of the shock, it is at 2% of GDP and almost doubles each period, reducing private investment even more rapidly, and leading to an explosive path for domestic debt and a rapid crowding out of private assets from the households wealth portfolio. In this latter cases, the model crashes relatively early in the sequence(in the seventh year in fact) indicating that the …scal problem would have to be addressed soon after the end of the shock. In all these cases the path for private investment is downwards, re‡ecting the reduction in …rms’return to capital relative to the cost of raising funds from the private sector (which is given by rrg ). However this is in the face of a rising return to capital. This re‡ects in part the movement in the real exchange rate. During the shock episode the real exchange rate appreciation, which re‡ects the income e¤ect arising from the real wage consequences of increased government employment, reduces the pro…tability and hence return to capital of the tradable sectors. Following the end of the shock, the real exchange rate returns towards its initial level, restoring pro…tability (enhanced by the decline in real wages from the reallocation of labour back to the private sector) which, combined with the slow growth and eventual decline in the capital stock raises the return to capital. This steady increase in the return to capital, however, is not as rapid as the increase in the real cost of capital and hence the economy does not
15
converge to a new steady state.
3.3
The Extended Portfolio Model
Introducing a currency demand function into the model confronts the authorities with a de…cit …nancing choice and confronts the modeller with how to specify the private sector’s in‡ation expectations. The key question is whether this additional structure produces any substantial changes in the real economy. To aid transparency, we consider this by concentrating on the evolution of private sector output and investment under di¤erent …nancing rules and di¤erent assumptions about currency demand. Tables 5(a) to 5(f) illustrate the performance of the model where, as with Table 4, we report the results for di¤erent assumptions concerning the elasticity of substitution in private portfolios between public debt and private assets. The behaviour of this model depends crucially on the value of the semielasticity of the demand for currency 2 . Econometric evidence would typically indicate a revenue maximizing in‡ation rate for low-income economies of around 25% which corresponds to a semi-elasticity of 5:0 . However, to illustrate the sensitivity of the results to this parameter we start by adopting a much less in‡ation elastic parameterization of the currency demand function, setting 2 = 1:5 which corresponds to a steady-state revenue maximizing in‡ation rate of 200%.14 Under this parameterization, though the addition of a currency demand function has consequences for investment and output, these e¤ects are secondorder relative to the e¤ect of changes in the portfolio elasticity of substitution. Consider …rst the case where government’s policy is to hold the currency supply constant so that the increased …scal expenditure is …nanced by debt issue only. This is shown in Table 5(a). Here, as would be expected, the long-run consequences for real rates of interest, investment, debt accumulation and growth are virtually identical to those reported for the basic portfolio model. As we allow for de…cit-…nancing strategies that involve some degree of monetization, the picture begins to change. Tables 5(b) illustrates the case where the temporary …scal expansion is accommodated by a corresponding temporary expansion in the money supply of 10% during the …scal expansion. Over the long run, while the monetary accommodation serves to permanently raise the price level (and the rate of in‡ation), the real bond rate (i.e. the real cost of capital) is lower, the public debt ratio is lower and the private investment rate and Real GDP are correspondingly higher. In the short-run, however, the monetary expansion raises nominal and real interest rates and the de…cit (although this is partly o¤set by higher seigniorage revenue). Nonetheless, this version of the model suggests that the presence of a currency demand function does little to change the underlying behaviour of the basic portfolio model, suggesting a degree of invariance to the purely monetary aspects of the de…cit …nancing mechanism. There are two quali…cations to this result. Table 5(c) reports the same experiment as 5(b) but with the more realistic value of 2 = 5:0. Under these circumstances the model is explosive for all values of f as in‡ation climbs with1 4 Recall the currency demand function is of the form c = 1 2 where c is real o y (1 + ) currency demand and y real consumption expenditure. De…ning seigniorage revenue as c then, conditional on y seigniorage is maximized where = 21 1 :
16
out limit until the model eventually crashes.15 The pathology of the model’s collapse is interesting. During the early stages of the run, the high levels of in‡ation generate quite large and rising seigniorage revenue which partially o¤sets the rising domestic de…cit. However as (expected) in‡ation exceeds the revenue maximizing rate (between periods 3 and 4) the private sector sharply reduces its currency demand and seigniorage drops away to zero. It is interesting to note, though, that during the run, the output gains are greater than those in 5(b), re‡ecting the surprise-supply e¤ects that emerge from the private sector’s adaptive in‡ation expectations. The combination of the higher in‡ation elasticity with adaptive expectations that causes this instability. As an alternative assumption we the private sector’s in‡ation expectations on the actual growth of the currency supply. In other words we assume that the government announces the growth in the currency supply, implements this growth rate, and the private sector uses this growth rate as their in‡ation expectation. Table 5(d) illustrates the corresponding case to 5(c). Here, while the initial in‡ation impact is powerful (re‡ecting the high in‡ation elasticity), the instantaneous correction of in‡ation expectations from period 3 onwards stabilizes prices and the economy follows a path similar to that shown in 5(a) with the long-run deterioration re‡ecting the now familiar higher structure of real interest rates. To summarize these two models we note that in circumstances where currency demand and in‡ation expectations are consistent with price stability, the major impact on the real economy still comes from ‘real’ factors driving the household’s portfolio preferences. The non-neutrality of currency demand impacts the real economy mainly through its short-run impact on the structure of nominal and real interest rates and through seigniorage. For a su¢ ciently low in‡ation elasticity, however, these secondary e¤ects are of only limited signi…cance on the evolution of the real economy. On the other hand excessive monetary emission, especially combined with adaptive expectations can rapidly lead to the demonetization of the economy and the emergence of an unsustainable in‡ationary spiral. We shall return to this Section 4.
3.4
The Asset Market Model
As with the extended portfolio model, there are a number of important decisions over parameter values to be made in implementing this model. To aid transparency, and to focus on an issue that seems central to the matter at hand, we opt for a …xed choice of most of these, including the relevant elasticities of substitution and the in‡ation expectation parameter, and concentrate on the in‡ation elasticity of the demand for money ( 2 ), and to a lesser extent, on the extent to which revenues are in‡ation proof and on the price-setting behaviour of the banking sector. We start with the assumption that 2 = 5:0, that tax revenues are collected without delay (i.e. v = 1), and that the banking sector sets interest rates to maintain a …xed markup over domestic deposit interest rates. Table 6 presents the results of simulations under three di¤erent assumptions as to how the de…cit is …nanced. 1 5 A similar result occurs for the low in‡ation elasticity if we simply increase the amount of the de…cit that is currency …nanced. For example the limiting case in which the authorities attempt to stabilize the domestic debt ratio, letting currency be the residual …nancing item, will also produce an unsustainable in‡ationary spiral.
17
Panel (a) assumes that the government follows a …xed money supply rule, so that the de…cit is wholly …nanced by issuing bonds. Given the …scal expansion, this policy is (price) de‡ationary. The real exchange rate appreciates sharply in the …rst period, but then reverts. Private investment, however, not only falls sharply during the shock, but - unlike the previous cases considered - continues to fall thereafter. This re‡ects the high and rising cost of funds induced by the de…cit …nancing. Ultimately, this strategy is not sustainable, re‡ecting the cumulative consequences of the de‡ationary spiral. Aside from the severe compression of investment and output, the upward pressure on the structure of domestic interest rates in general induces the budget de…cit to rise without limit - and in this case the de…cit is exacerbated by the negative seigniorage.. These powerful e¤ects stem, in part, from the restriction that nominal interest rates are constrained to be non-negative. Thus in the face of de‡ationary pressures, real interest rates on domestic deposits rise, and domestic currency demand rises. Households therefore begin to run down foreign deposits at an accelerating rate: since the model does not allow for the accumulation of foreign liabilities by households, the complete liquidation of foreign deposits (which occurs in period 6) renders the model infeasible. Panel (b) repeats the experiment but assumes ‘balanced …nancing’, that is the …nancing mix chosen to cover the de…cit is set to maintain the existing ratio of currency to government bonds. In sharp contrast to Panel (a) this proves to be extremely in‡ationary, with the in‡ation rate jumping to almost 15% after one year and reaching 50% after two years. Pressure on the domestic debt market is reduced so that the real bond rate falls, but with the …xed markup rule, this pull the general level of interest rates down and thus lowering the cost of capital. As a result private investment rises sharply. However, even when the …scal shock passes and the domestic budget returns a small surplus, real currency demand continues to fall precipitously, and in‡ation continues to rise. Moreover, the sharp reduction in domestic interest rates induces a contraction in the relative size of the …nancial sector with …rms …nancing a greater proportion of their investment from equity at the same time that households are switching away from domestic and into foreign denominated deposits. Once again this policy stance is not sustainable: the model eventually fails as a result of the collapse of household currency demand. Panel (c) examines a policy of monetary accommodation, whereby the money supply growth is increased to 5% per annum during the shock period. Under this policy in‡ation accelerates after the shock, but eventually stabilizes and returns towards its baseline value by period 6. During the shock period the cost of capital falls, so that private investment rises slightly, as does output. The persistence of in‡ation expectations combined with the tight monetary stance re-imposed following the shock produces an overshooting of interest rates which contract investment and output in period 5 before recovering in the period 6. What is really notable about these results is the extreme sensitivity of the system. Very minor changes in the …nancing mix have huge e¤ects on the outcomes. For example, the cumulative change in the amount of money creation between panels (a) and (c) is only equal to 10% of the initial money stock. However it induces a rise in the price level over the …rst three years of 67%, as opposed to a substantial fall. In brief, the implications of a conventionally parameterized demand for money function are to make the model excessively sensitive. Table 7 therefore presents similar results for a much lower degree of in‡ation sensitiv18
ity, with ( 2 ) set equal to 1.50. In all three cases, the lower in‡ation elasticity leads to a much smoother path for the economy. The …xed money supply rule now yields a very gentle initial de‡ation, which is reversed later: the balanced …nancing rule still gives a relatively sharp in‡ationary episode, with in‡ation peaking at 20% in the second year of the shock, and then being reversed. This (unanticipated) reverse has the e¤ect of raising real interest rates very sharply, so that private investment - which had increased during the shock - then falls to a very low level for the next two years before recovering again. The third panel again portrays a policy of monetary accommodation, with in‡ation held to 10% during the shock and tapering thereafter. Under this policy, private investment does not decline until the second year, but then remains depressed thereafter before recovering in period 6. Even with this less sensitive set-up for the demand for money, the real outcomes remain very responsive to the …nancing mix with the di¤erent choices implying total cumulative output di¤erences of over 1.6% of base-year GDP over the long run.16 So far we have assumed that the budget itself is in‡ation neutral, so that revenues and expenditures are both fully indexed to the price level. In practice, there are Olivera-Tanzi e¤ects whereby expenditures are typically more fully indexed than revenues. We explore the consequences of this by assuming that there is a collection lag of 6 months in respect of income taxes, other budgetary items being fully indexed. The results are presented in Table 8, where the low in‡ation elasticity assumption is maintained. Under balanced …nancing, there is now a much more rapid in‡ationary spiral (23% and 40% in the two shock years, as opposed to 14% and 20%). Interestingly, however, adopting the same policy of monetary accommodation (a rate of growth of the money supply of 5% per annum), produces a very similar trajectory of in‡ation. The in‡ation does worsen the budgetary position, but since the money supply rule forces this to be …nanced by increased sale of bonds, the impact is to raise interest rates and depress investment, not to raise in‡ation. Finally, note that in all the preceding experiments, the banking sector’s price-setting rule, which ensured a constant nominal mark-up of lending over deposit interest rates, generated strongly pro-cyclical e¤ects on the banks’profits. Whether this is a reasonable assumption from the perspective of the banking sector, it does have the consequence of inducing a high degree of movement in nominal (and real) interest rates ceteris paribus. To investigate the extent of this characteristic of the model we therefore modify this price setting assumption to allow the nominal markup to vary. Speci…cally banks are therefore assumed to pursue a price-setting policy which is a weighted average of the …xed nominal mark-up and a constant return on assets, with the weighting determined by the parameter 2 : Table 9 reports the results of running the same experiments as panel (c) of Tables 6 and 7 for the case where 2 = 0:50. By construction this parameterization dampens the movement in banks’ return on assets but, more importantly from a macroeconomic perspective, it has the consequence of smoothing out the track for in‡ation and real interest rates and generates an arguably more plausible evolution of the real economy. It is a moot point 1 6 Although not reported here, the full asset market model can also be run under the assumption that the private sector forms its in‡ation expectations on the basis of money supply announcements or rules. As with the extended portfolio model, this approach will serve to eliminate unsustainable in‡ationary or de‡ationary processes latent in the adaptive expectations process.
19
how banks’ price-setting behaviour should be determined, but it is clear that the choice of rule again has powerful consequences for the evolution of the asset market model.
4
Issues in Modelling Asset Markets in CGE Models
The previous section demonstrates that while this type of asset market model can generate feasible solutions, the introduction of monetary and …nancial features appears to make the system much less robust, or more “tender”. Shocks which the real model can handle routinely often cause the …nancially augmented version to crash, or at least crash earlier. Part of this increased sensitivity is to be expected; the real model simply omits some of the conditions which need to be satis…ed in the augmented model, so it is less constrained. What is more, the more restrictive environment governing solutions of the augmented model is not just a technical feature, but represents a number of economic “facts of life”confronting governments. Limited private appetites for holding government paper do raise the stakes in de…cit …nance. However, the increase in sensitivity appears much greater than we would have anticipated. We have already remarked on the need to adopt a demand for money speci…cation which has a much lower in‡ation elasticity than those normally obtained empirically. We have also parameterized the investment function to make investment reasonably sluggish in response to movements in rates of return, and assumed high substitution elasticities in the portfolio choice equations to make large compositional switches consistent with reasonably modest swings in relative interest rates. In brief, most of the relevant structure has been chosen with a view to limiting the extent of the economy’s sensitivity to impulses travelling along these …nancial channels, so the continued ”excess” sensitivity of the augmented model is something of a puzzle.
4.1
Modelling Asset Choices: Some General Issues
There are several general issues to consider. In some respects the least interesting is the one that has received most attention. This is the issue of rational expectations. It is true that some expectational mechanism is necessary for this type of intertemporal model to function at all. It is also true that expectation formation is very poorly understood, so that there is no dominant “positive” orthodoxy which can be incorporated into the model. Finally, it is also true that model results may be very sensitive to the speci…c expectational device adopted. However, rational expectations are highly suspect as positive devices even in the circumstances for which they are allegedly relevant, such as …nancial markets in industrial economies: they are altogether risible in the context of developing economies which are experiencing wholesale structural reform from highly distorted states, under the aegis of governing coalitions of uncertain durability. While the best way to incorporate expectations is an important issue, and the present model takes an unduly simplistic adaptive approach, our present focus is on other di¢ culties with the modelling of asset behaviour. We list them brie‡y. The …rst issue involves a familiar stock-‡ow problem. We could in principle model asset choice as being a choice over the stocks of various assets to be 20
held, at the end of the period of analysis, as a function of anticipated returns. For some assets, which are highly liquid, this is a natural approach to adopt. However, for illiquid assets, where there are sunk costs and irreversibility, it is more natural to think of decision-makers operating at the feasible margin, allocating the ‡ow of funds between alternative uses, while remaining substantially locked in to prior decisions. Combining stock with ‡ow allocations as this argument would suggest is rather intricate. However, opting for the simplicity of either stocks or ‡ows also has drawbacks. One major problem with the ‡ow perspective is that investors may well direct a positive aggregate ‡ow in such a way that some assets are being run down, while others are being accumulated at a rate faster than the total ‡ow. While this is plausible enough, it sits uncomfortably with the usual type of functions used, in this case for example a CES function directing ‡ows between the competing assets. As regards the stock perspective, the problem is to prevent unreasonably large reallocations taking place when there are substantial movements in relative returns, without rendering the whole system unduly sluggish when confronted with moderate movements. In the model presented here we have chosen to model the portfolio choices of agents over the stocks. Thus households make choices over the stock of currency and between stocks of domestic and foreign assets, …rms over their balance sheet debt-equity ratio, and banks over their total claims to government and the private sector. The second issue involves a related problem arising from the asset structure of the economy. Even in industrial countries, there is often a large gulf between the structure of household asset holding (often dominated by dwellings) and the structure of income-generating assets. Speci…cally, there is often a di¢ culty in relating the small share in households’ portfolios of these latter assets with their importance in the functioning of the economy, as measured by their share in national income. In many developing countries, there is a lack of …nancial depth, sometimes as a consequence of repression, sometimes a symptom of lack of development. This is typically revealed in a low ratio of …nancial assets to GDP. However, since capital output ratios are not generally believed to di¤er systematically between the two groups of countries, this implies that the ratio of money and debt to equity is even lower in the developing countries. If we simply impute an equity value from the relatively large share of operating surplus and depreciation in GDP, we end up with an overwhelming dominance of (possibly unmarketable) equity in household portfolios. This type of unbalanced portfolio stretches the capacity of simple functional forms to capture reasonable asset behaviour. Third, once asset stocks are incorporated into these models we may encounter the problem of ‘stock-outs’. The proliferation of additional non-negativity constraints on the economy, de…ned in terms of nominal asset values, reduces the feasible solution space and may signi…cantly increase the sensitivity of the model. The problems arising from initially unbalanced portfolios can be illustrated by referring to equation (2) which describes …rms’choice of gearing. The two parameters which will determine the extent to which the …rm wishes to alter its debt-to-equity ratio are the substitution parameter s , and the share parameter 's , which is …xed at calibration to re‡ect the initial distribution of the portfolio. If the initial portfolio distribution is highly skewed, then even with relatively low elasticities of substitution, it does not take very large movements in interest rate di¤erentials to generate large shifts in the portfolio shares. It 21
might therefore seem tempting to calibrate the model using very low values of the substitution elasticity. However, while this would indeed reduce the stockout problem itself, it would serve only to exacerbate di¢ culties elsewhere: the corollary of a low substitution elasticity is that a large movement in interest rate di¤erentials is required to encourage agents to alter their portfolios. If, as with GBR in the banks portfolio in this model, the supply of an asset is predetermined elsewhere in the system, a low substitution elasticity will imply that small changes in the composition of de…cit …nancing will require extremely large interest rate movements –which generates problems elsewhere in the system. The analogue to stock-out constraints are non-negativity constraints on nominal asset returns. While the model can technically handle negative nominal interest rates, if we choose to impose non-negativity constraints on them for economic reasons this places further constraints on the feasible solution space for the model, particularly in situations of price de‡ation. Stock-out and non-negativity considerations also feature in the design of government monetary policy rules. As utilised in the experiments of the previous section, one simple policy rule is for the government to specify a …xed growth rate for the money supply and allow the authorities to satisfy the government budget constraint through transactions in government securities. In the presence of developments which are budget improving, policy rules of this form will eventually lead to the repayment of the entire debt stock and the infeasibility of the model. In practice of course, governments or their monetary authorities are engaged in a continuous process of …ne tuning which would, in such circumstances, involve …scal adjustment and perhaps changes to the …nancing rule. Similarly in designing the asset-market CGE model it is possible in principle to specify feedback rules which ensure that the model does not encounter these non-negativity constraints but this necessarily comes at the cost of a signi…cant increase in the required parameterization of the model. A fourth issue concerns the case of an economy which has su¤ered a bout of very high in‡ation and has become severely demonetized (at least in terms of the local currency): the monetary base is then so shrunk that the impact of even minor government …nancing problems is greatly magni…ed. This probably makes macroeconomic policy rather “tender” even in real economies; in the modelling environment, the problem is to prevent it breaking down altogether. As we discuss in the section on the demand for money, it is surprisingly di¢ cult to avoid the collapse of the model while retaining relatively standard functional forms.
4.2
The Demand for Money
Conventional approaches to the demand for money are rooted in econometric estimation of fairly simple functional forms, with the emphasis being on the …t of the function within the domain of the sample. The resulting parameterization, coupled with the simplicity of the form, may produce a function which …ts the data well, but would imply implausible behaviour if conditions were markedly di¤erent. This is of little concern in the usual applications; the requirements of a CGE model, however, are potentially more demanding, since the solution procedure may require temporary ‘visits’ to regions far removed from the actual equilibrium. The modeler may also wish to explore policy packages which involve relatively extreme conditions, such as very high rates of in‡ation, and 22
so requires a demand for money function which is robust over a wide range of conditions. To make these rather general observations more concrete, consider the following illustration. Suppose we intend to use a currency demand function of the form: CU D = 0 CD(1 + e ) 2 (6) CP I where we assume demand to be unit elastic in consumer expenditure, CD. For simplicity we restrict attention to cases of (in‡ationary) equilibrium, so e = : Let C = CU D=CP I where CP I is the consumer price index. Now consider the magnitude of three numbers of interest. The elasticity of demand with respect to the in‡ation rate is 2 = 2 =(1 + ). The in‡ation tax is maximized when C is at a maximum, i.e. at = 1=( 2 1): Finally, the ratio of currency demanded at some in‡ation rate to that demanded at zero in‡ation is c = (1+ ) 2 . The problem we confront is that we have only one parameter, 2 , the estimate of which will be tied down by estimating 2 ; to determine both and c ; but we have independent requirements for each of these numbers of interest. For example, a typical value of 2 might be -0.8. If this was evaluated at an in‡ation rate of 25 per cent, it gives a value of 2 = 4, so that = 33 31 per cent, and c = 31:64 per cent However, if it had been evaluated at an in‡ation rate of 10 per cent, the value of 2 would have been 8.8, so that = 12:82 per cent, and c = 34.59 per cent. Now suppose the modeler wishes to examine the implications of a loss of …scal control, with in‡ation rising to the region of 100 per cent. With = 4, c100 = 6.25 per cent, while = 8.8 yields c100 = 0.22 per cent. In other words, conventional parameter estimates, obtained at relatively low in‡ation rates, are apt to produce unreasonably catastrophic falls in currency demand at high in‡ation rates. They also imply pretty substantial reductions as we move from zero in‡ation into the observed range; a reduction of 59 per cent (from zero to 25 per cent in‡ation) when =4, and one of 56.77 per cent (from zero to 10 per cent in‡ation) when =8.8. If we retain the same functional form, reducing the size of these e¤ects requires a lower value of : For example, suppose we wanted c100 = 33 per cent. We can achieve this by choosing =1.585; however, this pushes up to 170.9 per cent. This poses a problem for our modelling strategy. We may be forced to choose between a calibration which puts unreasonably high - with the consequence that there are large seigniorage revenue gains to be made by substantial increases in the in‡ation rate - and one which causes an exaggerated fall (increase) in the demand for money if in‡ation accelerates (decelerates) more than moderately. This is the strategy adopted in this paper. An alternative, which we have pursued elsewhere, is to adopt some other functional form, which is capable of more varied behaviour.17 1 7 It proves to be di¢ cult to obtain the ‡exibility required if we restrict attention to smooth functions with relatively few parameters such as a function cubic in the in‡ation rate. An alternative is the straightforward expedient of splicing together a sequence of simple functions, so that each is operative over di¤erent in‡ation ranges. In this way we obtain a continuous, piecewise smooth demand function. The speci…cation is as in the equation in the text, but with the term (1 + e ) 2 replaced by:
(1
SB )M dA (
(1 + M dB )
where SA = 0; SB = 0; if SA = 0; SB = 1; if 5 SA = 1; SB = 1; if e >
e M dB
)
+ SB [(1
e e
< 5
23
SA )(1 +
e
)
2
+ SA
M dC e
]
5
Conclusions
There has been much debate about the desirability, necessity and feasibility of incorporating asset markets into CGE models. The purpose of this paper has been to try to throw some light on these issues. It has tried to do this in two ways, one by discussing some of the choices involved, the other by presenting some illustrative comparative results from a linked hierarchy of models. The increasing complexity of the model hierarchy comes at a cost, both in the conceptual e¤ort required to construct a model and in the associated data requirements. However, we would argue that there are correspondingly large gains in the extra purchase obtained on the relations between macroeconomic phenomena and the evolution of the real economy, and these are illustrated by the simulations presented earlier. We found that the standard ‘real economy’ approach was likely to be seriously misleading in underestimating the real consequences of macroeconomic (budgetary) imbalances. This shortcoming could be repaired in part quite cheaply by a minimalist incorporation of portfolio e¤ects, but this was also potentially misleading in masking the very di¤erent real (as well as nominal) consequences of alternative …nancing strategies. The most general property of the comparison, however, is that the more sophisticated versions are far less robust than the analogous real model. Whereas the latter is routinely capable of riding the largest internal or external shocks very smoothly, the asset market model is far more likely to crash. In large measure, this re‡ects the fact that it is picking up the important and manifold cumulative (stock) consequences of ‡ow disequilibria, which are largely ignored in the real model. In part, it remains a puzzle, as illustrated by the conundrum over the modelling of the demand for money. It is worth stressing that the type of real and …nancial ‘marriage’discussed here is one where these real-macro relations are likely to be much weaker than they would be in a model incorporating a more sophisticated view of markets. The real economy has been portrayed throughout as characterized by ‡exible prices, full employment, market clearing, and price-taking agents. The sources of non-neutrality have been correspondingly few, principally the demand for money, the in‡ation expectations mechanism and Olivera-Tanzi budgetary effects. It is well known from modern macroeconomic theory that even minor distortions can interact with imperfect competition to generate major departures from neutrality. We intend in further work to pursue these interactions by generalising the present model in this direction. and = : It is convenient to think of this three part function as lying (at least mainly) between two rectangular hyperbolas in ; c space. These hyperbolas represent loci of equal in‡ation tax revenue. The composite function touches the higher of the two hyperbolas at and at this point we splice the original money demand function to a function whose slope coincides at but falls as in‡ation falls. The recovery in money demand as in‡ation falls further and further below becomes steadily less marked. To put it di¤erently, the fall in money demand as very low rates of in‡ation emerge from a period of price stability is modelled as initially very muted, but becoming stronger as in‡ation continues to rise. In the range to , demand now falls rapidly (we are on the La¤er part of the curve). However, we assume that this process does not continue inde…nitely, and that above the possibilities of further substitution out of currency become more restricted, so that the in‡ation tax is stabilized at its new, lower level. Above this level, we take demand to follow the lower of the two hyperbolas. Taken together, these components give us a fairly ‡exible reverse S-shaped function.
24
We close by reiterating that there are a number of unresolved issues in how best to model asset markets, and even a number of paradoxes. While there appears to be a reasonable pay-o¤ to incorporating them into CGEs, it remains unclear how best to do this.
25
6
References Adam, C.S.(1998) “A Financial Social Accounting Matrix for Zambia.” (mimeo, CSAE, University of Oxford). Bourguignon, F., B.H.Branson and J.de Melo (1992) “Adjustment and Income Distribution: A Micro-Macro model for counterfactual analysis”. Journal of Development Economics, Vol 38 pp 17-39. T.Condon, H.Dahl, and S.Devarajan (1987) “Implementing a Computable General Equilibrium Model on GAMS: The Cameroon Model” (mimeo, World Bank) Devarajan, S. S.Robinson and J.Lewis (1996) Getting the Model Right: Applied General Equilibrium Modelling Cambridge University Press (forthcoming). Easterly, W “Portfolio E¤ects in a CGE Model: Devaluation in a Dollarized Economy” in Taylor (ed) op cit. Ginsburgh,V., and M.Keyser (1997) The Structure of Applied General Equilibrium Models MIT Press. Lewis, J. (1992) “Financial Repression and Liberalization in a General Equilibrium Model with Financial Markets”Journal of Policy Modelling Vol 14 pp135-66. Robinson, S. (1991) “Macroeconomics, Financial Variables, and Computable General Equilibrium Models” World Development Vol 19, No.11 pp1509-1525. Rosensweig, J.A. and L.Taylor (1990) “Devaluation, Capital Flows and Crowding-Out: A CGE Model with Portfolio Choice for Thailand” in Taylor (ed) op cit. Talyor, L. (1990) (ed) Socially Relevant Policy Analysis: Structuralist Computable General Equilibrium Models for the Developing World MIT Press, Cambridge MA.
26
7
Appendix IA: Asset Model Equations
This Appendix lists the equations of the Full Asset Market model. To avoid duplication, equations which appear in the Full Asset Market model only are marked with an asterix (*); those marked with a double asterix (**) have a di¤erent speci…cation in the Real , Basic Portfolio, and Extended Portfolio models and are listed in Appendix IB. Equations with no quali…cation appear in all models.
7.1
Prices
Import prices:
pmi = pw mi er(1 + tmi )
(A1)
Export price:
p ei = p w ei er(1
tei )
(A2)
Consumer prices:
pci =
pdi XDCi + pmi M Ci QCi
(A3)
ppi =
pdi XDPi + pmi M Pi QPi
(A4)
pdi XDi + pei Ei Xi
(A5)
Producer prices:
Output prices:
pqi =
Value added prices (private sector):
X
pvaip = pqip
aji ppip
(A6)
j
Government value-added price:
pvapub =
P
lc
walc pub;lc Lpub;lc Xpub
(A7)
X
(A8)
Capital prices:
pk i =
bji ppi
j
Producer price index:
PPI =
X
wpi pqi
(A9)
wci pci (1 + iti )
(A10)
i
Consumer price index:
CP I =
X i
27
GDP de‡ator:
P GDP =
7.2
GDP V A RGDP
(A11)
Output and Factors
Aggregate production function: li;lc gi ki lc Li;lc KP 1 KG 1
Xi = ADi
(A12)
Average wage determination:
walc =
Xip pvaip lip;lc ip;lc Lip;lc
(A13)
Labour market equilibrium:
X
Li;lc = LSlc
(A14)
i
CET output aggregation:
Xi = ATi [ i Ei ti + (1
i )XDi
ti 1= ti
]
(A15)
World demand for exports:
Ei =
pw ei i[ w p ei
]
(A16)
i
Output share equation:
Ei pe 1 = [ i ][ XDi pdi
ti i
]
(A17)
i
Consumer good aggregation:
QCi = ACCi [ i M Ci
cci
+ (1
i )XDCi
cci
]
1= cci
(A18)
Consumption share equation:
pd M Ci = [ i ][ XDCi pmi 1
cci i
]
(A19)
i
Producer good aggregation:
QPi = ACP [ i M Pi
cpi
+ (1
i )XDPi
cpi
]
1= cpi
(A20)
Producer good share equation:
M Pi pd = [ i ][ XDPi pmi 1
28
cpi i
] i
(A21)
7.3
Current Demand
Intermediate goods demand:
X
N Di =
aij Xj
(A22)
j
Consumption demand:
pc (1 + iti )1 c CDi;hh = P i 1 j pcj (1 + itj )
c i c
P
Y Nhh
j
c
pcj (1 + itj )
j
pci (1 + iti )
j
+ ci (A23)
Depreciation:
DEP RCi =
i (pki KP 1 )
GDP(value added):
GDP V A =
X
(A24)
pvai Xi
(A25)
i
Real GDP:
RDGP =
X
Xi
N Di
(A26)
i
Government revenue:
GR = T ARIF F + DU T Y + IN DT AX + DIRT AX
(A27)
Government current expenditure:
X
GX = (pvapub +
ai;pub ppj )Xpub
(A28)
j
Import tari¤ revenue:
T ARIF F =
X
tmi Mi pw mi er
(A29)
i
Export duty revenue:
DU T Y =
P
i (tei Ei pei ) (1 tei )
(A30)
Domestic indirect tax revenue:
IN DT AX =
X
iti pc
i
Direct tax revenue:
DIRT AX =
X
X
CDi;hh
thh (vYhh + (1
hh
29
(A31)
hh
v)Y
1hh )
(A32)
7.4 7.4.1
Income, Savings and Investment Rates of Return
Gross pro…t:
X
RKip = pvaip Xip
walc
i;lc Li;lc
rc DCP
1
(A33)
lc
Real net rate of return on capital:
[RKip DEP RCip ] pkip KP 1ip
rrip =
(A34)
Average real net rate of return on capital:
rr =
P
ip [RKip
P
ip
DEP RCip ]
pkip KP
(A35)
1ip
[*]Real average rate of return on equity:
re = P
ip
7.4.2
P
ip
RKip
KEQ
1ip (1
+
(A36)
e)
Firms’Investment Financing
[**]Firms’investment function:
DKip = [( KP 1ip
ip
+
kip )
+ (rrip
rccip )]
(A37)
Demand for Investment Goods:
IDi =
X
bij DKip + bi;pub (DKG + DKpub )
(A38)
j
Capital Stock Dynamics:
KPi = KP
1i (1
i)
+ DKi
(A39)
[*] Firms’Balance Sheet
pkip KPip + W CBip + GWip = DCPip + KEQip
(A40)
[*]Investment …nancing constraint:
pkip DKip +
W CBip = EQYip +
DCPip
(A41)
[*] Firms’Equity Valuation
KEQip =
RKip qip re
(A42)
[**] Dividend payments:
DIVr = RKagric
30
EQYagric
(A43)
DIVh =
X
(RKicom
EQYicom )
(A44)
icom
[*] Total Investment Financing:
F F INip = KEQip + DCPip
(A45)
[*]Firms gearing allocation:
KEQip =
[(1 'si ) s (1 + rc)(1
['si
(1 + rm )(1 s ) ]F F INip s ) ] + [(1 'si ) s (1 + rm)(1 s
s)
(A46)
]
[*] Firms’cost of capital:
KEQip F F INip
ccip =
DCPip F F INip
rm +
rc
(A47)
[*] Firms’real cost of capital:
rccip =
(1 + ccip ) (1 + )
1
(A48)
[*] Firms’working capital requirements:
X W CBip = wxip (
i;lc wal Lip;lc )
+ wzip (ppip
aij Xip )
(A49)
j
lc
7.4.3
X
Household Income and Savings
[**]Cash receipts (rural):
Y Cr = (
agric;u wau Lagric;u )
+ er rmitr + CP I trnsr + rd DD
1r
(A50)
1l
(A51)
[**]Cash receipts (low):
0
Y Cl = @
X
i;u wau Li;u
i6=agric
[**]Cash receipts (high):
Y Ch
=
X
1
A + er rmitl + CP I trnsl + rd DD
i;s was Li;s
i
!
+Y BAN + rdDD
+ er rmits + CP I trnss 1s
+ er:rf F D
(A52)
1
Household (cash) savings:
HDSAVhh = shh Y Chh (1 [*] Household savings propensity:
31
thh )
(A53)
shh =
0 (1
+ rrm )
(A54)
1
Household net income
Y Nhh = Y Chh (1
thh )(1
shh ) + DIVhh
(A55)
[*]Net Household Wealth (rural):
N HWr = HDSAVr +
KEQagric
(A56)
[*]Net Household Wealth (low):
N HWl = HDSAVl
(A57)
[*]Net Household Wealth (high):
N HWh = HDSAVh +
X
KEQicom +
erF D
(A58)
1
icom
[* also Extended Portfolio Model] Household currency demand:
CU Dhh = CP I
X
0hh (
CDi;hh ) 1 (1 +
e
)
2
(A59)
i
[*also Extended Portfolio Model] In‡ation expectations I: e
= (1 + )
e
1
(A60a)
1
[*also Extended Portfolio Model] In‡ation expectations II: e
= po
1
(A60b)
[*]Rural and Low household demand deposits:
DDrural DDl
= HDSAVl + = HDSAVl
KEQagric CU Dl
CU Dl
(A61)
[*]High household …nancial assets:
DEP S = N HWh
CU Dh
X
KEQicom
(A61)
icom
[*]High household total deposits:
DEP S = DDh + erF D
(A62)
[*]High household …nancial asset allocation:
DDh =
['f
[(1 'f ) f (1 + rr )(1 d
(1 + rrx + f )(1 f ) ]DEP S f ) ] + [(1 'f ) f (1 + rrx + f )(1 f
[*]Weighted return on deposits
32
f)
]
(A63)
rm =
DD 1 er 1 F D rd + DEP S 1 DEP S
1
(rx +
1
f)
(A65)
[*]Real return on deposits:
rrm =
(1 + rm ) (1 + )
1
(A66)
1
(A67)
[*]Nominal return on foreign deposits:
rx = 7.4.4
(1 + rf )er er 1
Banks
[*] Total working capital requirements:
W CAP =
X
W CBip
(A68)
X
DCPip
(A69)
ip
[*] total credit to private sector:
DCP T =
ip
[*] Banks’required reserves:
X RES = ( DDhh + W CAP )
(A70)
hh
[*] Banks’desired cash balances:
X CU BD = ( DDhh + W CAP )
(A71)
hh
[*] Banks’minimum cash requirement:
CU BM IN = RES
GBR
(A72)
[*] Banks’cash rule:
CU B = M ax(CU BD; CU BM IN )
(A73)
[*] Banks’loan portfolio:
BN KP = GBR + DCP T
(A74)
[*] Banks’portfolio allocation:
DCP T =
['l
[(1 'l ) l (1 + rc)(1
l
(1 + rg)(1 l ) ]BN KP + [(1 'l ) l (1 + rg)(1
l)]
[*] Banks’mark-up rule:
33
l)
]
(A75)
rd
=
rc
2
P
+(1 [*] Banks’pro…t:
Y BAN = rc
ip P
DCP
+ rgGBR
1ip
1
(A76)
DD 1hh (1 + !) (rg bp)GBR 1 + (rc P 2) hh
X
bp)DCP T hh DD 1hh
DCP
1ip
+ rg
1 GBR 1
rd
ip
X
bpCU B
1
DD
1hh
1
(A77)
hh
[*] Banks’balance sheet constraint:
BN KP + CU B =
X
DDhh + W CAP
(A78)
hh
7.5
Government
Government current savings:
GOV SAV = GR
GX
(A79)
[**]Overall budget de…cit:
DEF
= pkpub (DKG + DKpub ) +
X
CP Itrnshh
(A80)
hh
+erDEBT + rgGBR
1
GOV SAV
[*]De…cit Financing
DEF =
CU S +
GBR + er:AID
er N F A
(A81)
[*]Money supply:
CU S =
X
CU Dhh + CU B
(A82)
hh
Money supply [Extended Portfolio Model only]:
CU S =
X
CU Dhh
(A82a)
hh
[*]De…cit Financing Rule I:
GBR = #[DEF
er(AID +
N F A)]
(A83)
[*]De…cit Financing Rule II:
(1 +
CU S) = p0
34
p1
1
(A84)
7.6
Equilibrium Conditions
[**]Balance of payments:
NFA
=
X
X
pw e Eix
ix
pw m Mim + AID
DEBT
im
+rf F D
1
+
X
rmitlc
FD
(A85)
lc
Commodity balance:
Qi =
X
CDi;hh + N Di + IDi
(A86)
hh
7.7
Objective Function
=
X
hwhh log
(clesi;lc ) (1+gles)
i CDi;lc
(gles) (1+gles) Xpub
(A87)
hh
8
AppendixIB:Real Model and Basic Portfolio Model Equations
This appendix speci…es the equations of the Real Model which di¤er from, or are not included in, the full model listed above. Equations marked by a dollar sign ($) appear in the Basic and Extended Portfolio Models only. Firms’investment allocation function [Neo-Classical Closure only]:
pkip DKip = kip (1 + (rrip
rr))[SAV IN G
pkpub (DKpub + DKG)] (A88)
Firms’investment shares [Neo-Classical Closure only]:
KPip jp KPjp
kip = P
(A89)
Total Private Investment Constraint [also Neo-Classical Closure]:
X
pki DKi + pkpub DKG =
i
X
HDSAVhh + GOV SAV + erAID
(A90)
hh
Investment function [Kaldorian Closure, Real Model only]:
DKip = q + (rr KP 1ip
rr0 )
(A91)
rrg )
(A92)
[$] Investment function [Portfolio Models]:
DKip = q + (rr KP 1ip Cash receipts (rural):
35
Y Cr = (
agric;u wau Lagric;u )
+ er rmitr + CP I trnsr
(A93)
Cash receipts (low):
0
Y Cl = @
X
i;u wau Li;u
i6=agric
Cash receipts (high):
Y Ch =
X
i;s was Li;s
i
!
1
A + er rmitl + CP I trnsl
+ er rmits + CP I trnss + rg GBR
(A94)
1
(A95)
Debt accumulation:
GBR = DEF
er(AID
N F A)
(A96)
[$] Household Wealth Portfolio [High income households]:
N HWhigh = GBR +
X
KEQip
(A97)
ip
[$] Household portfolio allocation:
GBR =
['p
[(1 'p ) p (1 + rr )(1 g
p
(1 + rr)(1 p ) ]N HWhigh p ) ] + [(1 'p ) p (1 + rr)(1
p)
]
(A98)
Balance of payments:
NFA =
X ix
pw e Eix
X
pw m Mim + AID
im
DEBT +
X lc
36
rmitlc
(A99)
9
Model Variables and Parameters
9.1 9.1.1
Variable List Endogenous Variables
er pmi pf e p ei pw ei pdi pci ppi pqi pvai pk i PPI CP I P GDP e
Xi XDi XDCi XDPi Qi QCi QPi Mi M Ci M Pi Ei GDP V A RGDP Li;lc walc N Di CDi;hh Y Chh Y Nhh DIVhh shh GX GR GOV SAV T ARIF F DU T Y IN DT AX DIRT AX DEF Y BAN
Nominal exchange rate. Domestic price of imports. Parallel foreign exchange market premium. Domestic price of exports. World price of exports. Price of domestic good. Price of composite good. Price of composite producer good. Price of composite output Value added price Destination price of capital. Producer price index. Consumer price index. GDP de‡ator CPI in‡ation rate Expected CPI in‡ation rate Domestic output Sales of domestic output to domestic market Sales of domestic consumer goods Sales of domestic producer goods. Total composite supply. Composite supply of consumer goods. Composite supply of producer goods. Total imports. Consumer imports. Producer imports. Total exports. Total value added. Real GDP Labour demand Average wage by skill-type Intermediate demand Consumption by household Household primary cash income Total disposable income Gross household dividend savings propensity Government recurrent expenditure Government recurrent revenue Government recurrent surplus. Tari¤ revenue Export duties. Indirect taxes Direct taxes. Overall government de…cit Commercial bank income
37
rg rc rd rrd rx rrx rm rrm rri rr re cci rcci RKi HDSAVhh DKi IDi KPi KG DEP RCi CU Dhh DDhh FD N HWhh DEP S EQYi KEQi F F INi W CBi DCPi W CAP DCP T CU B CU BD CU BM IN RES BN KP CU S SAV IN G
Nominal government bill rate Nominal lending rate Nominal domestic deposit rate Real return on domestic deposits Domestic nominal return on foreign deposits Real domestic return on foreign deposits Return on …nancial assets Real return on …nancial assets Sectoral return on capital Average return on capital Average return on equity Cost of capital by sector Real cost of capital by sector Gross sectoral pro…ts Household saving Investment demand by destination Investment demand by origin Sectoral capital stock Public capital stock Sectoral depreciation Household currency holdings Domestic currency deposits Foreign currency deposits (US$) Net household wealth Total household deposits Sectoral equity ‡ow Firms’equity Firms’total capital Working capital by sector Domestic lending by sector Total working capital Total domestic lending Banks’actual cash holdings Banks’desired cash Banks’minimum cash requirement Reserve Assets Commercial banks’total claims Domestic currency supply Total nominal savings
38
9.1.2
Exogenous Variables
pw mi rf tmi tei iti thh ci ; hh LSlc DKG DKpub trnshh DEBT rmithh GBR NFA AID
World price of imports World interest rate Import tari¤ rate. Export duty rate Indirect tax rate. Direct tax rate Subsistence consumption by sector Labour supply by skill type Government investment in public goods Government investment in government capital Government transfers External debt service (US$) Remittances from overseas (US$) Government debt Net foreign assets (US$) Foreign gross aid ‡ows (US$)
39
9.1.3
Technical, Behavioural and Policy Parameters
The following parameters are de…ned directly from the calibration, conditional on the value of the “exogenous parameters” in the calibration. aij input-output coe¢ cients. bij capital-composition coe¢ cients. wpi weights for producer price index wci weights for consumer price index wxi working capital requirements on wage bill wzi working capital requirements on intermediates AD Production function shift parameter (technology) Wage distribution matrix i;lc ATi Output CET aggregation function shift parameter Output CET share parameter i ACCi Consumer good CES aggregation shift parameter Consumer good CET share parameter. i ACPi Producer good CES aggregation shift parameter Producer good CES share parameter i clesi;hh Consumption utility shares gles Government share in GDP savings function intercept 0 CES consumption shares i Depreciation rate i Currency demand function intercept. 0hh 'si Firms’gearing share parameter 'f Household portfolio share parameter (domestic vs foreign …nancial assets) 'l Commercial bank loan portfolio share parameter 'p Household portfolio share parameter (basic portfolio model only) Commercial bank cash ratio ! Commercial bank mark up investment function intercept (real model only) qi capital asset pricing parameter kip investment share parameter (real model only) q capital asset pricing parameter (real model only) hw Household welfare weights. “Exogenous”Parameters
40
li;lc ki gi ti cci cpi i
di i 1
1 2
sip f l p f kip 2
# v p0 p1
9.2 i ip icom hh lc
Production function labour shares Production function private capital shares Production function public capital shares CET transformation parameter Consumer good CES substitution parameter. Producer good CES substitution parameter World export demand shift parameter Dummy variable = 1 if commodity traded on parallel foreign exchange market Elasticity of world export demand Savings elasticity Investment responsiveness parameter Income elasticity of currency demand In‡ation semi-elasticity of currency demand In‡ation expectations adjustment parameter Firms’gearing substitution parameter Household deposit portfolio substitution parameter Commercial bank loan portfolio substitution parameter Household wealth portfolio substitution parameter (basic portfolio model) Risk premium: domestic versus foreign assets Sector-speci…c investment risk premium Liquid asset ratio. Banks’markup parameter Treasury bill share in de…cit …nancing Tanzi tax collection lag Money supply growth rate (base) Money supply feedback parameter
Sets Productive Sectors [Agriculture, Mining, Manufacturing, Services, Public] Private Sectors [Agriculture, Mining, Manufacturing, Services] Non-Agricultural Private Sectors [Mining, Manufacturing, Services] Households [rural, low, high] Skill types [unskilled, skilled]
41
10
Appendix II: The Database
The data used to calibrate this model are reported in the attached Financial Social Accounting Matrix (FSAM) which is calibrated to calender year 1998. No o¢ cial SAM or Input-Output accounts exists for Zambia for the 1990s and the database has been constructed by the authors. The full details of the database and its compilation are available on request from the authors(Adam 1998). The current version incorporates a number of restrictive assumptions and simpli…cations justi…ed by features of the model. The main assumption is that the economy is assumed to be in a stationary state with zero in‡ation. Zero growth in the labour force is assumed while net real savings and net investment are zero for each household type and each productive sector respectively. The government’s net saving is negative, but o¤set exactly by net (grant) aid in‡ows. The input-output table is based on data for the Zambian economy and was computed for 1998 by the application of RAS methods from an o¢ cial 1980 input-output table .The capital stock was computed using a perpetual inventory method. The estimated total capital stock for the base year is distributed 76% of private sector capital and 24% of public capital stock, 80% of which is in the form of public good capital (roads etc.), with the remainder being speci…c to the production of government services. The implied aggregate capital-output ratio for the economy is approximately 1.6. The …nancial SAM tracks seven …nancial assets/liabilities in addition to the ‡ow of aid. These are currency (held by households and the banking sector); domestic savings deposits (held by households and …rms); foreign bank deposits (held by high income households); loans from the banking sector (held by …rms); government debt (held by the banking sector); net (o¢ cial) foreign reserves; and equity (held by households). The household sector’s net worth, which is approximately 150% of its annual income, is held in four main assets. Currency accounts for 2% of total wealth; domestic demand deposits for around 18%; foreign currency deposits for a further 2%; with the remaining 78% accounted for by equity claims on the private capital stock of the economy. Firms’ balance sheets are extremely simple. Total assets consist almost entirely (94%) of …xed capital with only a small quantity of current assets (6%) represented by their working capital balances. Claims on these assets are made up of the equity holdings of the household sector (83%) with debt to the banking sector accounting the residual 17% .The banking sector’s total worth is relatively small compared to the size of household wealth, re‡ecting low levels of …nancialization of savings. Total worth of the banking system is approximately 25% of household net wealth). Deposit liabilities are split between household (interest bearing) deposits (77%) and call deposits held for working capital purposes by …rms (23%). The banks asset portfolio is split between loans to the private sector (64%), and claims on the central bank / government (36%), with the latter consisting almost entirely of treasury bills. Finally, the government and central bank balance sheets re‡ect the overall steady state con…guration of the economy. Total assets of the central bank are split evenly between net foreign assets net domestic assets and are matched by base money consisting 25% in currency supply and 75% in Treasury Bills.
42
TABLE 2 Temporary Expansion in Government Employment: Real Model (Interest Free) Year Notes
0
[---- Fiscal Shock -----] 1 2
3
4
5
6
20
(a): Neo-Classical Closure Price Inflation Real Exchange Rate
0.00% 1,2
0.00%
3.76%
-0.43%
-3.07%
0.13%
0.12%
0.11%
1.13%
-3.62%
-3.21%
-0.14%
-0.27%
-0.39%
-0.51%
-1.62%
-2.05%
-2.04%
-0.04%
-0.05%
-0.05%
-0.05%
-0.07%
Dom Budget Balance [net of foreign aid]
3
Real GDP
1
-
-0.46%
-0.68%
-0.39%
-0.32%
-0.24%
-0.18%
0.49%
Private Sector Output
1
-
-2.77%
-2.97%
-0.42%
-0.34%
-0.28%
-0.21%
0.43%
Private Consumption
1
-
-0.28%
-7.99%
-0.43%
-0.34%
-0.26%
-0.19%
0.45%
Private Investment
3
12.50%
11.15%
11.13%
12.77%
12.78%
12.79%
12.79%
12.85%
Government Debt Ratio
3
11.45%
13.03%
15.16%
15.75%
15.76%
15.78%
15.80%
16.74%
Real return on capital
7.50%
6.49%
6.69%
7.75%
7.68%
7.61%
7.55%
6.94%
Real government bond rate
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
2.44%
-0.40%
-2.70%
0.10%
0.08%
0.07%
0.46%
-2.38%
-1.99%
0.74%
0.64%
0.56%
0.49%
0.03%
-2.01%
-1.99%
0.03%
0.02%
0.02%
0.02%
0.00%
(b): Kaldorian Closure Price Inflation Real Exchange Rate
1,2
-
Dom Budget Balance [net of foreign aid]
3
Real GDP
1
-
-0.33%
-0.39%
-0.11%
-0.10%
-0.09%
-0.08%
-0.02%
Private Sector Output
1
-
-2.54%
-2.58%
-0.09%
-0.08%
-0.07%
-0.07%
-0.02%
Private Consumption
1
-
-1.95%
-9.48%
-0.15%
-0.13%
-0.12%
-0.11%
-0.02%
Private Investment
3
12.50%
12.32%
12.32%
12.50%
12.50%
12.50%
12.50%
12.50%
Government Debt Ratio
3
11.45%
13.14%
15.19%
15.65%
15.61%
15.58%
15.54%
15.36%
Real return on capital
7.50%
6.75%
6.81%
7.60%
7.59%
7.58%
7.58%
7.52%
Real government bond rate
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
Notes [1] Cumulative change over baseline [2] Positive values imply real exchange rate depreciation [3] Percentage of GDP [4] No feasible solution possible
0.00%
0.00%
TABLE 3 Temporary Expansion in Government Employment: Real Model (Fixed Interest) Year Notes
0
[---- Fiscal Shock -----] 1 2
3
4
5
6
20
(a): Neo-Classical Closure Price Inflation Real Exchange Rate
0.00% 1,2
0.00%
3.73%
-0.41%
-3.05%
0.10%
0.09%
0.08%
0.36%
-3.59%
-3.19%
-0.15%
-0.25%
-0.33%
-0.42%
-0.77%
-2.04%
-2.12%
-0.23%
-0.25%
-0.26%
-0.27%
-0.68%
Dom Budget Balance [net of foreign aid]
3
Real GDP
1
-
-0.46%
-0.68%
-0.42%
-0.36%
-0.31%
-0.26%
-0.08%
Private Sector Output
1
-
-2.77%
-2.98%
-0.44%
-0.37%
-0.32%
-0.26%
-0.10%
Private Consumption
1
-
-0.28%
-7.95%
-0.35%
-0.27%
-0.20%
-0.14%
0.40%
Private Investment
3
12.50%
11.14%
11.06%
12.64%
12.64%
12.64%
12.64%
12.38%
Government Debt Ratio
3
11.45%
13.04%
15.25%
16.04%
16.26%
16.49%
16.74%
26.18%
Real Return on Capital
7.50%
6.50%
6.69%
7.75%
7.69%
7.65%
7.60%
7.38%
Real Government Bond Rate
5.00%
5.00%
5.00%
5.00%
5.00%
5.00%
5.00%
5.00%
0.00%
2.42%
-0.40%
-2.68%
0.09%
0.08%
0.07%
0.45%
-2.36%
-1.97%
0.73%
0.63%
0.55%
0.48%
0.03%
-2.00%
-2.07%
-0.16%
-0.17%
-0.18%
-0.19%
-0.51%
(b): Kaldorian Closure Price Inflation Real Exchange Rate
1,2
-
Dom Budget Balance [net of foreign aid]
3
Real GDP
1
-
-0.33%
-0.39%
-0.11%
-0.10%
-0.09%
-0.08%
-0.02%
Private Sector Output
1
-
-2.54%
-2.58%
-0.09%
-0.08%
-0.07%
-0.07%
-0.02%
Private Consumption
1
-
-1.95%
-9.48%
-0.15%
-0.13%
-0.12%
-0.11%
-0.02%
Private Investment
3
12.50%
12.32%
12.32%
12.50%
12.50%
12.50%
12.50%
12.50%
Government Debt Ratio
3
11.45%
13.14%
15.28%
15.93%
16.08%
16.25%
16.43%
23.49%
Real Return on Capital
7.50%
6.76%
6.81%
7.60%
7.59%
7.58%
7.58%
7.52%
Real Government Bond Rate
5.00%
5.00%
5.00%
5.00%
5.00%
5.00%
5.00%
5.00%
Notes [1] Cumulative change over baseline [2] Positive values imply real exchange rate depreciation [3] Percentage of GDP [4] No feasible solution possible
0.00%
TABLE 4 Temporary Expansion in Government Employment: Basic Portfolio Model Year Notes
0
[---- Fiscal Shock -----] 1 2
3
4
5
6
10
20
(a): High Elasticity of Substitution [ sigma = 50 ] Price Inflation Real Exchange Rate
0.00% 1,2
0.00%
2.65%
-0.37%
-3.00%
0.04%
0.03%
0.02%
-0.02%
-0.02%
-2.58%
-2.22%
0.80%
0.76%
0.73%
0.71%
0.76%
1.40%
-2.23%
-2.02%
0.18%
-0.28%
-0.30%
-0.33%
-0.54%
-1.18%
Dom Budget Balance [net of foreign aid]
3
Real GDP
1
-
-0.30%
-0.35%
-0.11%
-0.13%
-0.16%
-0.19%
-0.34%
-0.89%
Private Sector Output
1
-
-2.53%
-2.57%
-0.08%
-0.11%
-0.14%
-0.17%
-0.32%
-0.86%
Private Consumption
1
-
-2.00%
-9.43%
0.11%
0.11%
0.12%
0.12%
0.12%
0.08%
Private Investment
3
12.50%
12.43%
12.34%
12.28%
12.25%
12.22%
12.19%
12.05%
11.52%
Government Debt Ratio
3
11.45%
13.33%
15.42%
15.80%
16.08%
16.38%
16.71%
18.34%
26.08%
Household Wealth Portfolio (GBR/KEQT)
9.51%
11.13%
12.85%
13.10%
13.33%
13.58%
13.85%
15.18%
21.34%
Real Return on Capital
7.50%
6.56%
6.62%
7.65%
7.67%
7.69%
7.71%
7.84%
8.42%
Real Government Bond Rate
5.00%
4.41%
4.78%
5.83%
5.89%
5.95%
6.01%
6.34%
7.67%
0.00%
2.86%
-0.31%
-3.26%
-0.32%
-0.37%
-0.42%
-0.78%
[4] -
-2.78%
-2.48%
0.81%
1.15%
1.51%
1.94%
4.52%
-
-2.41%
-2.43%
-0.36%
-1.01%
-1.26%
-1.60%
-5.02%
-
(b): Moderate Elasticity of Substitution [ sigma = 10 ] Price Inflation Real Exchange Rate
1,2
-
Dom Budget Balance [net of foreign aid]
3
0.00%
Real GDP
1
-
-0.36%
-0.56%
-0.49%
-0.71%
-0.97%
-1.27%
-3.05%
-
Private Sector Output
1
-
-2.61%
-2.81%
-0.50%
-0.72%
-0.98%
-1.27%
-3.02%
-
Private Consumption
1
-
-1.47%
-8.37%
1.21%
1.31%
1.41%
1.52%
2.11%
-
Private Investment
3
12.50%
11.95%
11.31%
10.99%
10.68%
10.31%
9.88%
7.42%
-
Government Debt Ratio
3
11.45%
13.50%
16.00%
17.03%
18.14%
19.53%
21.29%
35.57%
-
Household Wealth Portfolio (GBR/KEQT)
9.51%
11.26%
13.32%
14.07%
14.94%
16.03%
17.41%
28.65%
-
Real Return on Capital
7.50%
6.49%
6.56%
7.74%
7.95%
8.19%
8.48%
10.30%
-
Real Government Bond Rate
5.00%
5.98%
8.05%
9.91%
10.86%
11.99%
13.32%
21.77%
-
0.00%
3.26%
-0.11%
-3.52%
-0.93%
-1.25%
-1.76%
[4] -
[4] -
-3.16%
-3.05%
0.48%
1.42%
2.71%
4.55%
-
-
-2.76%
-3.36%
-2.09%
-4.19%
-7.38%
-14.35%
-
-
(c): Low Elasticity of Substitution [ sigma = 5 ] Price Inflation Real Exchange Rate
1,2
-
Dom Budget Balance [net of foreign aid]
3
Real GDP
1
-
-0.48%
-0.97%
-1.37%
-2.25%
-3.46%
-5.13%
-
-
Private Sector Output
1
-
-2.77%
-3.32%
-1.51%
-2.41%
-3.64%
-5.34%
-
-
Private Consumption
1
-
-0.46%
-6.11%
4.18%
5.30%
6.76%
8.62%
-
-
Private Investment
3
12.50%
11.02%
9.11%
7.61%
5.66%
2.99%
-0.68%
-
-
Government Debt Ratio
3
11.45%
13.81%
17.26%
20.20%
24.79%
32.85%
48.48%
-
-
Household Wealth Portfolio (GBR/KEQT)
9.51%
11.51%
14.31%
16.54%
20.09%
26.24%
37.94%
-
-
Real Return on Capital
7.50%
6.37%
6.43%
7.83%
8.46%
9.36%
10.74%
-
-
Real Government Bond Rate
5.00%
8.97%
15.12%
20.94%
27.70%
37.66%
52.85%
-
-
Notes [1] Cumulative change over baseline [2] Positive values imply real exchange rate depreciation [3] Percentage of GDP [4] No feasible solution possible
0.00%
TABLE 5A Temporary Expansion in Government Employment: Extended Portfolio Model Year Adaptive Expectations No Expansion in Money Supply Lambda2 = 1.50 (a): High Elasticity of Substitution [ sigma = 50 ]
[---- Fiscal Shock -----] Notes
Money Supply Growth Expected Inflation Price Inflation Real Exchange Rate
0
1
2
3
0.00% 0.00%
0.00% 0.00%
0.00% 0.32%
0.00% 0.33%
0.00% -0.17%
0.00% -0.45%
0.00% -0.45%
0.00% 1,2
-
4
5
6
10
20
0.00% 0.26%
0.00% 0.05%
0.65%
0.33%
-0.67%
-0.74%
-0.44%
-0.01%
0.09%
0.09%
-0.84%
-0.59%
0.31%
0.29%
0.30%
0.32%
0.32%
0.60% -0.99%
Dom Budget Balance [net of foreign aid]
3
0.00%
-1.87%
-1.94%
-0.15%
-0.17%
-0.23%
-0.32%
-0.32%
Domestic Interest
3
0.57%
0.62%
0.73%
0.76%
0.77%
0.85%
0.94%
1.10%
1.81%
Seigniorage
3
0.00%
0.02%
0.01%
-0.02%
-0.02%
-0.01%
0.00%
0.00%
0.00%
Real GDP
1
-
-0.05%
-0.08%
-0.10%
-0.13%
-0.16%
-0.19%
-0.37%
-1.05%
Private Sector Output
1
-
-2.13%
-2.14%
-0.09%
-0.13%
-0.16%
-0.19%
-0.38%
-1.10%
Private Consumption
1
-
-1.72%
-9.97%
0.13%
0.13%
0.13%
0.13%
0.10%
-0.09%
Private Investment
3
12.50%
12.41%
12.32%
12.30%
12.27%
12.24%
12.21%
12.08%
11.57%
140.00
139.10
138.64
139.58
140.61
141.23
141.25
139.69
139.78
3
11.45%
13.19%
15.09%
15.43%
15.72%
16.02%
16.35%
17.93%
25.77%
Real Currency Supply Government Debt Ratio Household Wealth Portfolio (GBR/KEQT)
10.32%
11.93%
13.64%
13.88%
14.14%
14.40%
14.69%
16.09%
22.97%
Real Return on Capital
7.50%
7.02%
7.07%
7.56%
7.57%
7.60%
7.63%
7.72%
8.12%
Real Government Bond Rate
5.00%
4.84%
5.17%
5.70%
5.75%
5.81%
5.88%
6.17%
7.35%
0.00% 0.00%
0.00% 0.00%
0.00% -0.01%
0.00% -0.42%
0.00% -0.92%
0.00% -0.89%
0.00% -0.50%
0.00% 0.03%
4 -
(b): Moderate Elasticity of Substitution [ sigma = 10 ] Money Supply Growth Expected Inflation Price Inflation Real Exchange Rate Dom Budget Balance [net of foreign aid]
0.00% 1,2
-
-0.01%
-0.84%
-1.41%
-0.86%
-0.11%
0.42%
-0.62%
-0.96%
-0.65%
0.36%
0.46%
0.62%
0.79%
1.89%
-
-2.16%
-0.58%
-0.86%
-1.23%
-1.66%
-4.46%
-
3
0.00%
-1.95%
Domestic Interest
3
0.57%
0.72%
1.00%
1.27%
1.58%
1.99%
2.47%
5.73%
-
Seigniorage
3
0.00%
0.00%
-0.03%
-0.05%
-0.03%
0.00%
0.01%
-0.02%
-
Real GDP
1
-
-0.10%
-0.24%
-0.43%
-0.68%
-0.96%
-1.29%
-3.26%
-
Private Sector Output
1
-
-2.19%
-2.33%
-0.46%
-0.72%
-1.02%
-1.37%
-3.43%
-
Private Consumption
1
-
-1.20%
-8.97%
1.24%
1.32%
1.41%
1.51%
1.98%
-
Private Investment
3
12.50%
11.96%
11.36%
11.09%
10.79%
10.44%
10.04%
7.69%
-
140.00
140.01
141.20
143.22
144.47
144.64
144.03
144.04
-
11.45%
13.35%
15.64%
16.57%
17.62%
18.92%
20.57%
34.01%
-
Real Currency Supply Government Debt Ratio
3
Household Wealth Portfolio (GBR/KEQT)
10.32%
12.07%
14.12%
14.86%
15.76%
16.87%
18.28%
29.67%
Real Return on Capital
7.50%
6.98%
7.07%
7.66%
7.80%
7.96%
8.16%
9.39%
-
Real Government Bond Rate
5.00%
6.33%
8.29%
9.51%
10.37%
11.38%
12.57%
20.15%
-
0.00% 0.00%
0.00% 0.00%
0.00% -0.63%
0.00% -1.99%
0.00% -2.96%
0.00% -3.06%
0.00% -2.82%
4 -
4 -
(c): Low Elasticity of Substitution [ sigma = 5 ] Money Supply Growth Expected Inflation Price Inflation Real Exchange Rate Dom Budget Balance [net of foreign aid]
0.00% 1,2
-
-1.26%
-3.34%
-3.93%
-3.16%
-2.57%
-3.12%
-
-1.20%
-0.80%
0.46%
1.01%
2.01%
3.81%
-
-
-2.10%
-2.65%
-1.79%
-3.39%
-6.34%
-12.25%
-
-
3
0.00%
Domestic Interest
3
0.57%
0.91%
1.60%
2.72%
4.56%
7.94%
14.73%
-
-
Seigniorage
3
0.00%
-0.04%
-0.12%
-0.14%
-0.12%
-0.10%
-0.13%
-
-
Real GDP
1
-
-0.18%
-0.56%
-1.18%
-2.05%
-3.21%
-4.76%
-
-
Private Sector Output
1
-
-2.31%
-2.70%
-1.29%
-2.20%
-3.40%
-4.97%
-
-
Private Consumption
1
-
-0.19%
-6.79%
4.32%
5.53%
7.12%
9.23%
-
-
Private Investment
3
12.50%
11.07%
9.26%
7.88%
6.02%
3.49%
0.03%
-
-
140.00
141.78
146.68
152.68
157.66
161.82
167.04
-
-
11.45%
13.65%
16.83%
19.53%
23.75%
31.05%
44.91%
-
-
Real Currency Supply Government Debt Ratio Household Wealth Portfolio (GBR/KEQT)
3
10.32%
12.35%
15.17%
17.40%
20.96%
27.03%
38.31%
-
Real Return on Capital
7.50%
6.89%
7.05%
7.87%
8.36%
9.15%
10.45%
-
-
Real Government Bond Rate
5.00%
9.22%
15.14%
20.07%
26.37%
35.64%
49.76%
-
-
Notes [1] Cumulative change over baseline [2] Positive values imply real exchange rate depreciation [3] Percentage of GDP [4] No feasible solution possible
TABLE 5B Temporary Expansion in Government Employment: Extended Portfolio Model Year Adaptive Expectations 10% Expansion in Money Supply Lambda2 = 1.50 (a): High Elasticity of Substitution [ sigma = 50 ]
[---- Fiscal Shock -----] Notes
0
Money Supply Growth Expected Inflation
0.00% 0.00%
Price Inflation Real Exchange Rate
0.00% 1,2
-
1
2
10.00% 0.00%
10.00% 4.96%
3
4
0.00% 11.15%
0.00% 10.10%
5
0.00% 4.67%
6
0.00% -1.02%
10
20
0.00% -0.18%
0.00% 0.67%
9.91%
17.34%
9.04%
-0.76%
-6.71%
-7.90%
4.38%
4.38%
-0.06%
0.81%
0.72%
0.05%
-0.57%
-0.64%
0.58%
0.50% -0.73%
Dom Budget Balance [net of foreign aid]
3
0.00%
-2.64%
-3.41%
-1.16%
-0.08%
0.67%
0.84%
-0.73%
Domestic Interest
3
0.57%
1.59%
2.56%
1.95%
0.66%
-0.25%
-0.46%
1.62%
1.57%
Seigniorage
3
0.00%
0.32%
0.53%
0.25%
-0.02%
-0.20%
-0.26%
0.14%
0.14%
Real GDP
1
-
0.07%
0.15%
0.03%
-0.08%
-0.20%
-0.25%
-0.23%
-0.80%
Private Sector Output
1
-
-1.94%
-1.79%
0.08%
-0.08%
-0.25%
-0.32%
-0.22%
-0.84%
-1.61%
-10.39%
0.21%
0.11%
0.01%
-0.02%
0.12%
-0.05%
12.42%
12.35%
12.35%
12.34%
12.32%
12.30%
12.17%
11.78%
Private Consumption
1
Private Investment
3
12.50% 140.00
140.11
131.34
120.45
121.37
130.09
141.25
141.03
138.59
3
11.45%
12.71%
13.96%
14.03%
14.22%
14.58%
15.00%
16.17%
21.60%
Real Currency Supply Government Debt Ratio Household Wealth Portfolio (GBR/KEQT)
-
10.32%
11.48%
12.59%
12.62%
12.80%
13.14%
13.52%
14.52%
19.30%
Real Return on Capital
7.50%
7.22%
7.44%
7.69%
7.53%
7.38%
7.37%
7.75%
7.98%
Real Government Bond Rate
5.00%
4.96%
5.37%
5.62%
5.49%
5.40%
5.45%
5.98%
6.82%
0.00% 0.00%
10.00% 0.00%
10.00% 4.69%
0.00% 10.52%
0.00% 9.51%
0.00% 4.36%
0.00% -1.12%
0.00% -0.31%
(b): Moderate Elasticity of Substitution [ sigma = 10 ] Money Supply Growth Expected Inflation Price Inflation Real Exchange Rate
0.00% 1,2
-
4 -
9.39%
16.34%
8.50%
-0.79%
-6.60%
-7.77%
3.88%
-
-0.15%
0.78%
0.75%
0.14%
-0.25%
-0.24%
1.61%
-
Dom Budget Balance [net of foreign aid]
3
0.00%
-2.70%
-3.58%
-1.47%
-0.51%
0.16%
0.17%
-3.44%
Domestic Interest
3
0.57%
1.67%
2.78%
2.32%
1.16%
0.35%
0.31%
4.65%
-
Seigniorage
3
0.00%
0.31%
0.51%
0.24%
-0.02%
-0.21%
-0.26%
0.13%
-
Real GDP
1
-
0.03%
0.04%
-0.21%
-0.47%
-0.74%
-1.02%
-2.38%
-
Private Sector Output
1
-
-1.99%
-1.91%
-0.19%
-0.51%
-0.83%
-1.13%
-2.49%
-
Private Consumption
1
Private Investment
3
Real Currency Supply Government Debt Ratio
3
Household Wealth Portfolio (GBR/KEQT)
-1.23%
-9.69%
0.96%
0.93%
0.96%
1.05%
1.63%
-
12.50%
-
12.09%
11.66%
11.52%
11.32%
11.04%
10.70%
8.87%
-
140.00
140.79
133.11
122.69
123.66
132.40
143.56
144.25
-
11.45%
12.82%
14.34%
14.77%
15.43%
16.40%
17.66%
25.99%
-
10.32%
11.58%
12.91%
13.25%
13.83%
14.69%
15.78%
22.86%
Real Return on Capital
7.50%
7.19%
7.45%
7.76%
7.68%
7.66%
7.75%
8.91%
-
Real Government Bond Rate
5.00%
6.05%
7.60%
8.23%
8.66%
9.37%
10.33%
16.21%
-
0.00% 0.00%
10.00% 0.00%
10.00% 4.19%
0.00% 9.19%
0.00% 7.87%
0.00% 2.80%
0.00% -2.61%
4 -
4 -
(c): Low Elasticity of Substitution [ sigma = 5 ] Money Supply Growth Expected Inflation Price Inflation Real Exchange Rate Dom Budget Balance [net of foreign aid]
0.00% 1,2
-
8.38%
14.18%
6.56%
-2.27%
-8.03%
-9.80%
-
-0.32%
0.69%
0.80%
0.39%
0.33%
1.04%
-
-
-1.97%
-2.36%
-4.50%
-
-
3
0.00%
-2.82%
-3.97%
-2.30%
Domestic Interest
3
0.57%
1.81%
3.26%
3.31%
2.88%
3.29%
5.74%
-
-
Seigniorage
3
0.00%
0.28%
0.45%
0.20%
-0.07%
-0.27%
-0.38%
-
-
Real GDP
1
-
-0.03%
-0.19%
-0.75%
-1.45%
-2.37%
-3.56%
-
-
Private Sector Output
1
-
-2.07%
-2.18%
-0.78%
-1.57%
-2.58%
-3.83%
-
-
Private Consumption
1
-
-0.49%
-8.14%
3.10%
3.86%
5.01%
6.61%
-
-
Private Investment
3
12.50%
11.44%
10.17%
9.30%
8.00%
6.14%
3.58%
-
-
140.00
142.09
136.89
128.46
131.44
142.92
158.44
-
-
11.45%
13.04%
15.14%
16.64%
19.12%
23.34%
30.73%
-
-
Real Currency Supply Government Debt Ratio Household Wealth Portfolio (GBR/KEQT)
3
10.32%
11.78%
13.61%
14.86%
16.99%
20.58%
26.74%
-
Real Return on Capital
7.50%
7.13%
7.45%
7.91%
8.04%
8.34%
9.02%
-
-
Real Government Bond Rate
5.00%
8.18%
12.48%
15.47%
19.54%
25.77%
35.11%
-
-
Notes [1] Cumulative change over baseline [2] Positive values imply real exchange rate depreciation [3] Percentage of GDP [4] No feasible solution possible
TABLE 5C Temporary Expansion in Government Employment: Extended Portfolio Model Year Adaptive Expectations 10% Expansion in Money Supply Lambda2 = 5.00 (a): High Elasticity of Substitution [ sigma = 50 ]
[---- Fiscal Shock -----] Notes
0
Money Supply Growth Expected Inflation
0.00% 0.00%
Price Inflation Real Exchange Rate
0.00% 1,2
-
1
10.00% 0.00% 9.91%
2
10.00% 4.96%
3
0.00% 21.37%
37.78% 102.84%
-0.06%
1.66%
3.36%
4
0.00% 62.10%
5
0.00% 190.93%
6
10
20
0.00% 972.31%
4 -
4 -
319.75% 1753.69% 1558.89% 4.33%
-
-
4.44%
4.79%
-
-
Dom Budget Balance [net of foreign aid]
3
0.00%
-2.64%
-4.76%
-6.13%
-8.50%
-9.34%
-7.78%
-
-
Domestic Interest
3
0.57%
1.59%
4.19%
7.85%
10.64%
11.63%
9.90%
-
-
Seigniorage
3
0.00%
0.32%
0.98%
1.32%
0.98%
0.29%
0.02%
-
-
Real GDP
1
-
0.07%
0.28%
0.45%
0.66%
0.77%
1.50%
-
-
Private Sector Output
1
-
-1.94%
-1.59%
0.70%
1.00%
1.15%
1.99%
-
-
Private Consumption
1
-
-1.61%
-10.52%
0.60%
0.77%
0.80%
2.23%
-
-
Private Investment
3
12.50%
12.42%
12.34%
12.36%
12.40%
12.48%
11.92%
-
-
140.00
140.11
111.86
55.15
13.14
0.71
0.04
-
-
11.45%
12.71%
13.75%
12.94%
11.58%
9.97%
8.39%
-
-
10.32%
11.48%
12.38%
11.58%
10.35%
8.92%
7.35%
-
-
Real Return on Capital
7.50%
7.22%
7.67%
8.39%
8.69%
8.77%
9.60%
-
-
Real Government Bond Rate
5.00%
4.96%
5.55%
6.12%
6.17%
5.93%
5.31%
-
-
0.00% 0.00%
10.00% 0.00%
10.00% 4.69%
0.00% 20.13%
0.00% 57.95%
0.00% 173.86%
4 -
4 -
4 -
289.77% 1468.69%
Real Currency Supply Government Debt Ratio
3
Household Wealth Portfolio (GBR/KEQT)
(b): Moderate Elasticity of Substitution [ sigma = 10 ] Money Supply Growth Expected Inflation Price Inflation Real Exchange Rate
0.00% 1,2
-
9.39%
35.56%
95.77%
-0.15%
1.60%
3.36%
4.47%
-
-
-
4.75%
-
-
-
Dom Budget Balance [net of foreign aid]
3
0.00%
-2.70%
-4.88%
-6.31%
-8.86%
-9.88%
-
-
Domestic Interest
3
0.57%
1.67%
4.34%
8.06%
11.04%
12.22%
-
-
-
Seigniorage
3
0.00%
0.31%
0.95%
1.30%
1.01%
0.33%
-
-
-
Real GDP
1
-
0.03%
0.17%
0.23%
0.37%
0.49%
-
-
-
Private Sector Output
1
-
-1.99%
-1.72%
0.46%
0.70%
0.86%
-
-
-
Private Consumption
1
Private Investment
3
Real Currency Supply Government Debt Ratio
3
Household Wealth Portfolio (GBR/KEQT)
-1.23%
-9.86%
1.05%
0.84%
0.38%
-
-
-
12.50%
-
12.09%
11.71%
11.80%
12.07%
12.54%
-
-
-
140.00
140.79
95.44%
-
-
-
11.45%
12.82%
14.11%
13.56%
12.34%
10.67%
-
-
-
114.24 5835.64% 1497.20%
10.32%
11.58%
12.69%
12.12%
11.00%
9.51%
-
-
-
Real Return on Capital
7.50%
7.19%
7.67%
8.46%
8.85%
9.00%
-
-
-
Real Government Bond Rate
5.00%
6.05%
7.61%
7.85%
7.08%
5.51%
-
-
-
0.00% 0.00%
10.00% 0.00%
10.00% 4.19%
0.00% 17.63%
0.00% 49.04%
0.00% 136.39%
4 -
4 -
4 -
(c): Low Elasticity of Substitution [ sigma = 5 ] Money Supply Growth Expected Inflation Price Inflation Real Exchange Rate
0.00% 1,2
-
8.38%
31.07%
80.44%
223.74%
904.47%
-
-
-
-0.32%
1.47%
3.31%
4.74%
5.58%
-
-
-
Dom Budget Balance [net of foreign aid]
3
0.00%
-2.82%
-5.17%
-6.89%
-10.23%
-12.59%
-
-
Domestic Interest
3
0.57%
1.81%
4.70%
8.73%
12.60%
15.31%
-
-
-
Seigniorage
3
0.00%
0.28%
0.87%
1.25%
1.07%
0.43%
-
-
-
Real GDP
1
-
-0.03%
-0.06%
-0.28%
-0.44%
-0.59%
-
-
-
Private Sector Output
1
-
-2.07%
-1.99%
-0.11%
-0.17%
-0.28%
-
-
-
Private Consumption
1
-
-0.49%
-8.39%
2.65%
2.39%
1.73%
-
-
-
Private Investment
3
12.50%
11.44%
10.30%
10.04%
10.06%
10.42%
-
-
-
140.00
142.09
-
-
-
11.45%
13.04%
14.89%
15.21%
14.94%
14.08%
-
-
-
Real Currency Supply Government Debt Ratio Household Wealth Portfolio (GBR/KEQT)
3
119.25 6608.87% 2041.43% 203.23%
10.32%
11.78%
13.38%
13.53%
13.22%
12.40%
-
-
-
Real Return on Capital
7.50%
7.13%
7.66%
8.59%
9.21%
9.68%
-
-
-
Real Government Bond Rate
5.00%
8.18%
12.21%
13.51%
13.48%
12.19%
-
-
-
Notes [1] Cumulative change over baseline [2] Positive values imply real exchange rate depreciation [3] Percentage of GDP [4] No feasible solution possible
TABLE 5D Temporary Expansion in Government Employment: Extended Portfolio Model Year Expectations based on Money Supply Growth 10% Expansion in Money Supply Lambda2 = 5.00 (a): High Elasticity of Substitution [ sigma = 50 ]
[---- Fiscal Shock -----] Notes
0
Money Supply Growth Expected Inflation Price Inflation Real Exchange Rate
1,2
1
2
3
4
5
6
10
20
0.00% 0.00%
0.00% 0.00%
0.00% 0.00%
0.00% 0.00%
0.00% 0.00%
0.00% 0.00%
0.00% 0.00%
10.00% 10.00%
10.00% 10.00%
0.00%
73.11%
12.10% -34.15%
-
2.17%
0.09%
-5.05%
-0.40%
-0.03%
0.01%
0.01%
-5.63%
0.14%
0.50%
0.50%
0.42%
0.60% -0.87%
Dom Budget Balance [net of foreign aid]
3
0.00%
-5.80%
-2.93%
5.73%
0.45%
-0.21%
-0.29%
-0.25%
Domestic Interest
3
0.57%
5.43%
1.95%
-6.54%
0.05%
0.83%
0.92%
1.05%
1.71%
Seigniorage
3
0.00%
1.51%
0.25%
-1.07%
-0.17%
-0.01%
0.00%
0.00%
0.00%
Real GDP
1
-
0.40%
0.10%
-0.88%
-0.18%
-0.16%
-0.19%
-0.34%
-0.98%
Private Sector Output
1
-
-1.42%
-1.89%
-1.33%
-0.21%
-0.16%
-0.18%
-0.35%
-1.03%
-1.28%
-10.27%
-0.80%
0.03%
0.09%
0.09%
0.07%
-0.08%
12.42%
12.37%
12.40%
12.30%
12.27%
12.24%
12.11%
11.63%
Private Consumption
1
Private Investment
3
12.50% 140.00
88.96
87.29
132.56
139.61
140.17
140.21
140.18
139.90
3
11.45%
12.19%
13.62%
15.10%
15.46%
15.74%
16.03%
17.51%
24.70%
Real Currency Supply Government Debt Ratio Household Wealth Portfolio (GBR/KEQT)
-
10.32%
10.97%
12.30%
13.77%
13.91%
14.14%
14.40%
15.72%
22.03%
Real Return on Capital
7.50%
7.81%
7.28%
6.02%
7.49%
7.61%
7.63%
7.71%
8.08%
Real Government Bond Rate
5.00%
5.43%
5.16%
4.16%
5.64%
5.79%
5.85%
6.11%
7.21%
0.00% 0.00%
10.00% 10.00%
10.00% 10.00%
0.00% 0.00%
0.00% 0.00%
0.00% 0.00%
4 0.00% 0.00%
4 0.00% 0.00%
4 -
0.00%
72.59%
11.49% -34.52%
(b): Moderate Elasticity of Substitution [ sigma = 10 ] Money Supply Growth Expected Inflation Price Inflation Real Exchange Rate
1,2
-
2.15%
0.03%
-5.13%
-0.48%
-0.14%
-0.27%
-
-5.65%
0.25%
0.71%
0.81%
1.69%
-
Dom Budget Balance [net of foreign aid]
3
0.00%
-5.84%
-3.08%
5.57%
-0.08%
-0.97%
-1.30%
-3.57%
Domestic Interest
3
0.57%
5.48%
2.13%
-6.34%
0.67%
1.71%
2.07%
4.78%
-
Seigniorage
3
0.00%
1.51%
0.24%
-1.10%
-0.17%
-0.02%
0.00%
-0.01%
-
Real GDP
1
-
0.38%
0.02%
-1.09%
-0.59%
-0.79%
-1.08%
-2.84%
-
Private Sector Output
1
-
-1.44%
-1.98%
-1.57%
-0.64%
-0.83%
-1.14%
-2.98%
-
Private Consumption
1
Private Investment
3
Real Currency Supply Government Debt Ratio
3
Household Wealth Portfolio (GBR/KEQT)
-1.05%
-9.66%
0.25%
1.14%
1.28%
1.38%
1.85%
-
12.50%
-
12.22%
11.79%
11.35%
11.02%
10.71%
10.35%
8.23%
-
140.00
89.23
88.03
134.44
141.72
142.40
142.60
143.71
-
11.45%
12.25%
13.89%
15.82%
16.80%
17.90%
19.28%
30.21%
-
10.32%
11.02%
12.54%
14.40%
15.06%
15.99%
17.17%
26.47%
-
Real Return on Capital
7.50%
7.80%
7.27%
6.05%
7.64%
7.87%
8.03%
9.09%
-
Real Government Bond Rate
5.00%
6.07%
7.07%
7.49%
9.65%
10.62%
11.67%
18.32%
-
0.00% 0.00%
10.00% 10.00%
10.00% 10.00%
0.00% 0.00%
0.00% 0.00%
0.00% 0.00%
4 0.00% 0.00%
4 -
4 -
0.00%
71.62%
10.20%
-35.54%
-6.27%
-2.19%
-2.62%
-
-
2.11%
-0.09%
-5.72%
0.55%
1.51%
2.58%
-
-
(c): Low Elasticity of Substitution [ sigma = 5 ] Money Supply Growth Expected Inflation Price Inflation Real Exchange Rate
1,2
-
Dom Budget Balance [net of foreign aid]
3
0.00%
-5.92%
-3.39%
5.15%
-1.74%
-4.23%
-7.66%
-
Domestic Interest
3
0.57%
5.58%
2.52%
-5.80%
2.65%
5.53%
9.46%
-
-
Seigniorage
3
0.00%
1.50%
0.21%
-1.17%
-0.22%
-0.08%
-0.10%
-
-
Real GDP
1
-
0.36%
-0.14%
-1.56%
-1.52%
-2.42%
-3.69%
-
-
Private Sector Output
1
-
-1.47%
-2.18%
-2.10%
-1.66%
-2.58%
-3.89%
-
-
Private Consumption
1
Private Investment
3
Real Currency Supply Government Debt Ratio Household Wealth Portfolio (GBR/KEQT)
3
-0.62%
-8.37%
2.73%
4.52%
5.87%
7.60%
-
-
12.50%
-
11.86%
10.57%
8.89%
7.38%
5.35%
2.57%
-
-
140.00
89.73
89.57
138.95
148.25
151.56
155.64
-
-
11.45%
12.37%
14.45%
17.52%
20.59%
25.50%
34.24%
-
-
10.32%
11.13%
13.03%
15.90%
18.29%
22.40%
29.62%
-
Real Return on Capital
7.50%
7.78%
7.24%
6.09%
7.98%
8.63%
9.51%
-
-
Real Government Bond Rate
5.00%
7.28%
11.05%
15.46%
21.69%
28.80%
39.23%
-
-
Notes [1] Cumulative change over baseline [2] Positive values imply real exchange rate depreciation [3] Percentage of GDP [4] No feasible solution possible
TABLE 6 Temporary Expansion in Government Employment: Full Asset Market Model with Currency Substitution
6
-
4 -
10
0.00%
1.00 0.00%
0.45%
13.99%
1.00 0.00%
-0.59%
0.11%
48.08%
1.00 6.99%
0.66%
-2.76%
67.00%
1.00 27.54%
-
-
-
4 -
4
-
-
-
4 -
5
-
-
-
4 -
6
-
-
-
4 -
10
0.00%
-
0.00%
1.00 0.00%
-1.11%
-0.73%
9.35%
1.05 0.00%
-0.72%
0.42%
32.85%
1.05 4.68%
0.75%
-0.18%
67.34%
1.00 18.76%
0.74%
-4.92%
82.93%
1.00 43.05%
0.41%
-5.57%
-5.72%
1.00 62.99%
1.46%
18.33%
7.34%
1.00 28.63%
-
-
-
4 -
[---- Fiscal Shock -----]
4 -
-0.98%
Year
5
-
[---- Fiscal Shock -----]
1.00 -10.09%
0.00%
Year
-35.42% -
[---- Fiscal Shock -----]
1.00 -3.67%
-
Year
-16.50% -
-0.51%
1.24% -0.04%
-0.48%
-0.44%
0.29% -0.24%
-0.51%
-0.56%
-1.75% -0.71%
-0.74%
-0.70%
-8.20% -2.35%
-
-
-
-
-
-
-
-
0.57% 0.00%
-1.32%
0.00%
1.72% 0.43%
-0.85%
0.42%
3.44% 1.06%
1.00%
1.02%
2.92% 0.78%
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
0.57% 0.00%
13.04%
-2.16%
-1.49%
-0.09%
1.46% 0.29%
14.05%
-10.93%
-1.12%
0.18%
3.14% 0.81%
15.45%
-2.10%
0.98%
0.87%
3.44% 0.99%
14.24%
0.72%
0.87%
1.04%
2.05% 0.67%
6.83%
7.80%
-0.39%
0.01%
0.16% -0.05%
15.49%
-4.96%
-1.01%
-1.54%
0.12% 0.06%
-
-
-
-
-
10
1.00 -0.66%
-
0.85% 0.00%
-1.94%
-
-
6
-6.69% 0.49%
High Inflation Elasticity of Demand for Money Adaptive Expectations [Lambda2 = 5, sigmas = 5, sigmaf =5, sigmal = 25]
1.00 -0.08%
-1.89%
-0.31%
-
-
0 1 2 3 4 5 (c): Monetary Accomodation [5% growth in money during shock]
-1.24% 1.95%
3
1.00 0.00%
-0.56%
0.57% 0.00%
-1.89%
-
-
0 1 2 (b): "Balanced Finance"
-0.15% 0.07%
4
1.00 0.00%
-0.24%
3
0.00%
-1.28%
-0.24%
-
-
-
0 1 2 (a): Fixed Nominal Money Supply
Currency Supply Growth Inflation Expectations
-1.38%
-3.13%
Notes
Price Inflation -
-
-1.01%
3
1,2 0.00%
Real Exchange Rate
1
1
15.28%
Dom Budget Balance [net of foreign aid]
Real GDP
14.93%
-11.70%
Domestic Interest Seigniorage
Private Sector Output
-2.92%
12.50%
13.49%
-
12.50%
34.30 #DIV/0! 0.00%
-
-
36.82 56.12% 1.53%
299.22 43.24
-
-
34.71 44.21% 1.82%
668.82 21.04
0.69% 13.60% 5.19% 29.06%
-
-
63.49 31.29% 4.70%
317.25 36.52
14.93% 25.96% 21.92% 2.30%
-5.01%
-
-
106.24 26.97% 9.19%
478.51 78.50
-1.32% 5.23% -10.93% -1.89%
21.52%
0.00% 9.59%
9.72%
134.43 27.48% 11.44%
761.51 93.69
-2.54% 0.13% -16.97% 2.39%
-8.21%
7.18% 16.35%
-
3.33%
140.00 28.57% 11.45%
1030.24 85.06
2.84% 3.30% -9.61% 4.18%
-11.53%
13.83% 10.89%
138.30% 11.86%
0.84%
-
1140.00 80.00
4.20% 4.68% -1.62% 2.25%
-6.08%
33.86% 11.55%
138.30% 9.87%
11.10%
-
-
5.00% 6.00% 3.00% 3.00%
-0.40%
58.10% 12.93%
138.30% 50.52%
1.07%
-
-
-
3.42%
58.03% 15.63%
138.30% 37.22%
11.40%
-
-
-
-
51.58% 17.30%
138.30% 20.90%
-7.80%
50.51 28.57% 4.09%
-
-
-
-
138.30% 8.07%
11.27%
94.91 28.57% 7.73%
441.51 62.81
-
-
-
138.30% 3.20%
-0.34%
132.14 28.57% 10.81%
652.74 95.00
-1.97% 1.24% -15.07% 0.05%
-
-
-
11.86%
140.00 28.57% 11.45%
976.03 92.13
-0.41% 0.48% -14.52% 2.65%
-10.96%
-
-
-
-
1140.00 80.00
2.80% 3.38% -4.08% 3.46%
-9.92%
29.93% 11.37%
-
12.50%
-
-
5.00% 6.00% 3.00% 3.00%
-2.23%
52.24% 12.21%
-
1
282.19 20.87% 31.82%
-
-
3.42%
56.60% 15.23%
138.30% 37.97%
3
3281.18 64.73
-
-
51.58% 17.30%
138.30% 27.28%
Private Consumption
1829.80 82.82
12.43% 12.61% 34.40% 1.53%
-
-
138.30% 9.95%
Private Investment
1395.68 77.79
8.58% 8.65% 14.11% 4.94%
27.99%
-
138.30% 3.20%
182.23 22.19% 19.30%
1221.72 83.31
9.16% 9.12% 8.19% 3.32%
12.56%
62.33% 32.49%
-
152.15 22.85% 15.63%
1167.33 70.96
10.90% 10.69% 6.26% 6.07%
7.96%
63.80% 22.10%
-
141.97 23.21% 14.37%
1140.00 80.00
7.64% 7.97% 4.24% -0.22% 6.85%
65.22% 18.31%
138.30% -15.43%
140.21 25.49% 12.89%
5.00% 6.00% 3.00% 3.00% 4.39%
67.70% 16.55%
138.30% -5.25%
140.00 28.57% 11.45%
3.42%
60.13% 16.73%
138.30% 1.04%
3
51.58% 17.30%
138.30% 5.30%
Real Currency Demand Currency to Debt Ratio (CUS/GBR) Government Debt Ratio Real Domestic Deposits Foreign Deposits (Us$ m) Real Interest Rates Government Bond Rate Domestic Lending Rate Domestic Deposit Rate Return on Foreign Deposits Real Cost of Capital Portfolio Composition Banks [ GBR / DCPT ] Firms [ DCPT / FFIN ]
138.30% 4.34%
Bank Mark-up 138.30% Banks' Return on Assets 3.20% Notes [1] Cumulative change over baseline [2] Positive values imply real exchange rate depreciation [3] Percentage of GDP [4] No feasible solution possible
Year [---- Fiscal Shock -----]
Year
TABLE 7 Temporary Expansion in Government Employment: Full Asset Market Model with Currency Substitution Low Inflation Elasticity of Demand for Money Adaptive Expectations [Lambda2 =1.5, sigmas = 5, sigmaf =5, sigmal = 25] [---- Fiscal Shock -----]
Year
[---- Fiscal Shock -----]
13.99%
1.00 0.00%
-1.08%
-4.09%
19.73%
1.00 6.99%
0.08%
-2.52%
-1.02%
1.00 13.36%
-0.03%
0.72%
-11.04%
1.00 6.17%
-0.05%
3.90%
-8.52%
1.00 -2.43%
-0.05%
3.84%
-1.49%
1.00 -5.48%
0.15%
-2.19%
0.88%
1.00 2.84%
0.00%
-
0.00%
1.00 0.00%
-1.11%
-0.73%
9.35%
1.05 0.00%
-1.19%
-3.96%
10.63%
1.05 4.68%
0.09%
-0.30%
-1.54%
1.00 7.65%
-0.10%
0.19%
-8.09%
1.00 3.06%
0.03%
4.67%
-4.63%
1.00 -2.51%
-0.19%
0.72%
-1.82%
1.00 -3.57%
0.57%
-8.30%
-4.95%
4 1.00 2.36%
10
0.00%
1.00 0.00%
0.45%
6
3.79%
1.00 -2.22%
-0.98%
0 1 2 3 4 5 (c): Monetary Accomodation [5% growth in money during shock]
2.75%
1.00 -0.45%
-
10
0.11%
1.00 -1.00%
0.00%
6
1.00 -2.00%
-0.59%
13.97%
5
-0.01% 3.38%
4
1.00 -0.47%
0.05%
3
-3.54% -0.52%
0 1 2 (b): "Balanced Finance"
1.00 -0.08%
-0.21%
10
-0.86% 2.95%
6
1.00 0.00%
-0.03%
5
-0.15% 0.27%
4
1.00 0.00%
-0.16%
3
0.00%
-1.27%
-0.20%
0 1 2 (a): Fixed Nominal Money Supply
Currency Supply Growth Inflation Expectations
-1.38%
-3.13%
Notes
Price Inflation -
1
1
12.50%
-
-
-
0.57% 0.00%
11.86%
-0.34%
-1.89%
-0.31%
0.85% 0.00%
11.30%
-7.85%
-1.93%
-0.50%
1.29% -0.03%
11.67%
0.71%
-0.43%
-0.41%
0.73% -0.12%
12.38%
-0.95%
-0.27%
-0.40%
0.97% 0.00%
12.64%
0.00%
-0.37%
-0.33%
0.75% 0.00%
12.56%
-1.29%
-0.14%
-0.30%
1.36% 0.09%
11.56%
-3.95%
0.13%
-0.53%
2.24% 0.13%
12.50%
-
-
-
0.57% 0.00%
13.49%
-2.92%
-1.32%
0.00%
1.72% 0.43%
13.26%
-8.77%
-1.50%
0.09%
2.31% 0.56%
10.39%
3.02%
-0.31%
-0.12%
1.30% -0.03%
10.40%
1.88%
-0.44%
-0.42%
-0.07% -0.35%
12.27%
-1.03%
-0.23%
-0.41%
-0.57% -0.30%
14.00%
-2.61%
0.13%
-0.10%
-0.45% -0.05%
13.95%
-0.27%
1.01%
1.03%
-0.01% 0.03%
12.50%
-
-
-
0.57% 0.00%
13.04%
-2.16%
-1.49%
-0.09%
1.46% 0.29%
12.16%
-7.77%
-1.81%
-0.19%
2.09% 0.32%
10.66%
1.93%
-0.37%
-0.30%
1.37% -0.05%
10.94%
1.46%
-0.54%
-0.49%
0.17% -0.27%
12.29%
-1.41%
-0.28%
-0.49%
0.06% -0.16%
13.34%
-1.04%
-0.24%
-0.28%
-0.16% -0.06%
12.32%
3.11%
-0.30%
0.14%
-0.21% -0.17%
3
1,2 0.00%
Real Exchange Rate
Real GDP
1
Dom Budget Balance [net of foreign aid]
Private Sector Output
3
Domestic Interest Seigniorage
Private Consumption
1345.66 51.04
Private Investment
1361.71 80.00
3.50% 4.20% -0.62% -15.09%
145.40 24.93% 13.61%
1325.43 89.09
0.63% 1.38% 1.48% -0.88%
3.73%
150.58 25.87% 13.64%
1254.18 65.06
5.31% 6.15% 5.38% 7.61%
1.27%
54.99% 18.90%
147.84 26.23% 13.24%
1052.25 68.03
10.26% 11.16% 9.89% 3.50%
5.71%
54.22% 19.08%
140.99 26.17% 12.65%
947.32 67.73
13.59% 14.19% 8.43% 6.92%
9.61%
53.47% 18.77%
138.30% -0.67%
129.59 26.37% 11.52%
1030.24 85.06
8.83% 8.90% 0.42% -0.36%
9.05%
53.34% 18.07%
138.30% -0.41%
127.59 26.18% 11.41% 1140.00 80.00
4.20% 4.68% -1.62% 2.25%
1.35%
57.06% 15.83%
138.30% 0.54%
134.43 27.48% 11.44% 1223.66 85.78
5.00% 6.00% 3.00% 3.00%
-0.40%
63.79% 14.31%
138.30% 1.06%
140.00 28.57% 11.45% 1375.80 93.37
-0.94% 0.46% 0.47% 2.50%
3.42%
58.03% 15.63%
138.30% 6.89%
137.77 28.57% 11.15% 1372.52 80.65
-2.17% -0.85% 0.10% 2.94%
-0.08%
51.58% 17.30%
138.30% 11.54%
152.38 28.57% 12.48% 1218.07 62.56
4.22% 5.73% 7.20% 6.25%
0.23%
46.19% 18.73%
138.30% 8.07%
149.65 28.57% 12.29% 957.53 56.89
11.66% 13.25% 12.58% 6.43%
6.88%
46.94% 19.98%
138.30% 3.20%
136.44 28.57% 11.21% 834.24 69.36
14.24% 15.42% 9.06% 4.69%
12.22%
45.94% 19.98%
138.30% 0.51%
121.15 28.57% 9.92% 976.03 92.13
5.09% 5.53% -4.46% -1.66%
9.51%
46.12% 18.42%
138.30% -1.55%
120.70 28.57% 9.86% 1140.00 80.00
2.80% 3.38% -4.08% 3.46%
-3.04%
50.65% 15.43%
138.30% -2.10%
132.14 28.57% 10.81% 1315.93 155.86
5.00% 6.00% 3.00% 3.00%
-2.23%
58.59% 13.61%
138.30% 0.15%
140.00 28.57% 11.45% 1259.94 99.66
9.92% 9.78% 7.07% 29.98%
3.42%
56.60% 15.23%
138.30% 7.80%
144.45 22.49% 15.09% 1321.31 79.97
6.21% 6.01% 1.82% 7.04%
8.00%
51.58% 17.30%
138.30% 14.77%
142.53 22.68% 14.73%
1305.31 93.57
4.89% 4.74% 2.41% -0.47%
2.97%
66.76% 17.55%
138.30% 9.95%
146.46 22.61% 15.19%
1314.28 79.63
6.45% 6.32% 3.27% 5.75%
2.51%
67.84% 16.94%
138.30% 3.20%
146.62 22.93% 15.00%
1213.75 83.58
8.76% 8.68% 6.30% 3.49%
3.95%
66.88% 17.55%
138.30% 7.90%
146.61 22.97% 14.98%
1167.33 70.96
10.86% 10.65% 6.06% 6.11%
6.41%
66.67% 17.42%
138.30% 5.09%
141.42 23.21% 14.31%
1140.00 80.00
7.64% 7.97% 4.24% -0.22% 6.68%
65.82% 17.55%
138.30% 2.78%
140.21 25.49% 12.89%
5.00% 6.00% 3.00% 3.00% 4.39%
67.80% 16.47%
138.30% 3.59%
140.00 28.57% 11.45%
3.42%
60.13% 16.73%
138.30% 2.75%
3
51.58% 17.30%
138.30% 5.52%
Real Currency Demand Currency to Debt Ratio (CUS/GBR) Government Debt Ratio Real Domestic Deposits Foreign Deposits (Us$ m) Real Interest Rates Government Bond Rate Domestic Lending Rate Domestic Deposit Rate Return on Foreign Deposits Real Cost of Capital Portfolio Composition Banks [ GBR / DCPT ] Firms [ DCPT / FFIN ]
138.30% 4.34%
Bank Mark-up 138.30% Banks' Return on Assets 3.20% Notes [1] Cumulative change over baseline [2] Positive values imply real exchange rate depreciation [3] Percentage of GDP [4] No feasible solution possible
1.00 2.75%
4
-3.71%
1.00 -2.66% -1.74%
1.00 -3.18%
-9.22%
-6.07%
1.00 2.21%
0.57% 0.00%
0.00%
-
0.00%
1.00 0.00%
-1.32%
-0.02%
2.38% 0.68%
-1.52%
0.77%
22.64%
1.00 0.00%
13.95%
-9.04%
-1.52%
0.15%
3.55% 1.04%
-1.90%
-5.69%
40.51%
1.00 11.32%
8.94%
5.17%
-0.44%
-0.15%
1.48% -0.08%
0.44%
-3.96%
-3.08%
1.00 25.91%
6.18%
7.03%
-0.74%
-0.70%
-3.41% -1.38%
1.54%
1.29%
-37.02%
1.00 11.42%
-
-
-
-
-
-
-
-
4 -
5
-
-
-
-
-
-
-
-
4 -
6
-
-
-
-
-
-
-
-
4 -
10
[---- Fiscal Shock -----]
3
-8.07%
0.55%
-
-3.62%
Year
1.00 7.50%
0.13%
-0.37% -0.21%
-
13.85%
[---- Fiscal Shock -----]
-1.99%
-0.22%
-0.03%
-
Year
TABLE 8 Temporary Expansion in Government Employment: Full Asset Market Model with Currency Substitution Low Inflation Elasticity of Demand for Money Adaptive Expectations
1.05 4.62%
5.53%
-0.18% -0.06%
-0.53%
12.50%
Dom Budget Balance [net of foreign aid] Domestic Interest Seigniorage
3
4
10.37%
0.22%
-0.35%
3.60%
3
1.05 0.00%
0.60%
0.13% -0.13%
-0.34%
12.14%
2
9.24% 0.65% 0.21%
-0.55%
-0.88%
Olivera-Tanzi Effects on Budget [nu = 0.50]
1.00 0.00%
-4.38% 0.35% 0.14% -0.27%
-0.30%
13.35%
0 1 (b): "Balanced Finance"
0.00% -1.55% -1.54% 1.58% -0.06%
-0.57%
-1.80%
10
-1.51% 2.49% 0.31% -0.41%
-0.60%
12.42%
6
0.00% 1.55% 0.29% -0.37% -0.44%
1.34%
5
0.57% 0.00% -0.17% -2.05%
11.02%
0 1 2 (a): 5% Increase in Money Supply
Currency Supply Growth Inflation Expectations
-1.64%
1.93%
Notes
Price Inflation
1 -
10.41%
1,2
Real GDP 1 -7.16%
Real Exchange Rate
Private Sector Output
11.60%
-
-1.89%
-
-
12.86%
-
-
-
-
158.62 28.57% 13.07%
-
-
-
12.50%
109.04 28.57% 8.93%
1951.56 42.35
-
-
-
1
891.32 43.85
20.82% 24.22% 38.70% 8.63%
-
-
-
3
659.43 65.11
19.69% 21.32% 14.03% 4.89%
34.65%
-
-
Private Consumption
893.53 97.68
5.29% 5.27% -9.62% -3.60%
14.30%
33.26% 26.62%
-
Private Investment
1140.00 80.00
2.35% 2.67% -7.32% 3.80%
-7.48%
46.85% 14.98%
138.30% -12.68%
109.78 28.57% 8.97% 1389.06 46.35
5.00% 6.00% 3.00% 3.00%
-4.60%
65.10% 11.36%
138.30% 9.58%
128.60 28.57% 10.52% 1363.06 76.70
3.52% 4.21% -1.23% -18.29%
3.42%
60.09% 14.13%
138.30% 27.06%
140.00 28.57% 11.45% 1320.30 91.78
0.38% 1.13% 1.31% -2.27%
4.20%
51.58% 17.30%
138.30% 14.56%
147.46 24.61% 14.01% 1274.79 64.74
4.86% 5.68% 4.65% 8.04%
1.00%
55.14% 19.26%
138.30% 3.20%
150.17 25.77% 13.66% 1072.74 69.83
9.95% 10.77% 9.68% 2.95%
5.15%
54.21% 19.08%
138.30% -1.33%
147.55 26.20% 13.23% 952.73 65.55
15.00% 15.35% 9.32% 8.42%
9.35%
53.67% 18.69%
138.30% -0.50%
142.08 25.77% 12.96%
1035.23 81.98
11.76% 11.36% 1.93% 0.04%
10.02%
54.19% 18.17%
138.30% 0.84%
130.61 25.36% 12.09%
1140.00 80.00
5.14% 5.39% -1.16% 1.41%
2.85%
60.14% 15.74%
138.30% 0.87%
128.02 24.65% 12.18%
5.00% 6.00% 3.00% 3.00%
-0.07%
70.55% 13.84%
138.30% 7.29%
134.56 26.55% 11.87%
3.42%
61.08% 15.42%
138.30% 13.03%
140.00 28.57% 11.45%
51.58% 17.30%
138.30% 8.49%
3
138.30% 3.20%
Real Currency Demand Currency to Debt Ratio (CUS/GBR) Government Debt Ratio Real Domestic Deposits Foreign Deposits (Us$ m) Real Interest Rates Government Bond Rate Domestic Lending Rate Domestic Deposit Rate Return on Foreign Deposits Real Cost of Capital Portfolio Composition Banks [ GBR / DCPT ] Firms [ DCPT / FFIN ] Bank Mark-up Banks' Return on Assets Notes [1] Cumulative change over baseline [2] Positive values imply real exchange rate depreciation [3] Percentage of GDP [4] No feasible solution possible
TABLE 9 Temporary Expansion in Government Employment: Full Asset Market Model with Currency Substitution
19.25%
1.00 25.43% -6.65%
1.00 22.34%
-
4 -
0.00%
1.00 0.00%
4.85%
1.05 0.00%
-0.99%
7.69%
1.05 2.43%
0.13%
1.54%
2.33%
1.00 5.06%
0.56% -0.04%
0.04%
1.86%
-1.14%
1.00 3.69%
4
-0.62%
0.27% -0.08%
0.01%
2.44%
-2.55%
1.00 1.28%
5
-0.34%
-0.46%
0.15% -0.07%
-0.02%
2.43%
-2.07%
1.00 -0.64%
-0.58%
0.17%
0.14%
0.42% 0.01%
0.08%
-0.06%
0.35%
1.00 0.09%
[---- Fiscal Shock -----]
32.70%
1.00 18.16%
-4.26%
-1.06%
1.31% 0.07%
-0.70%
-0.53%
13.14%
Year
1.00 9.05%
-
-1.31%
2.30% 0.25%
-0.72%
-0.65%
-1.42%
[---- Fiscal Shock -----]
27.27%
-
0.00%
1.46% 0.16%
-0.78%
-0.70%
13.02%
Year
1.05 2.43%
6.78%
-
0.57% 0.00%
-0.41%
-2.30%
-1.02%
Dom Budget Balance [net of foreign aid] Domestic Interest Seigniorage
3
10
15.68% 2.06%
0.50%
-
-
-2.08%
12.55%
6
1.05 0.00%
-0.56%
0.78%
-0.22% -0.11%
-
-
-0.48%
Adaptive Expectations Variable Mark-up 5% increase in Money Supply
4.85% -0.98% 0.72%
1.36% 0.29%
-1.75%
-
12.17%
0 1 2 3 (b): Low Inflation Elasticity , Kappa2 = 0.5
1.00 0.00%
-1.80% 0.51% 2.88% 0.58%
-1.88%
-1.50%
0.43%
10
0.00% -4.26% -0.95% 3.53% 0.64%
-1.49%
-1.94%
11.36%
6
-1.31% 3.08% 0.47% -1.03%
-1.68%
-6.75%
5
0.00% 1.46% 0.16% -0.85% -1.20%
10.15%
4
0.57% 0.00% -0.41% -2.42%
0.60%
0 1 2 3 (a): High Inflation Elasticity , Kappa2 = 0.5
Currency Supply Growth Inflation Expectations
-2.08%
11.24%
Notes
Price Inflation
1 -
-
1,2
Real GDP 1
-
-
Real Exchange Rate
Private Sector Output
-2.39%
12.50%
12.12%
141.05 26.26% 12.53%
9.19%
141.60 26.75% 12.43%
1206.06 84.57
1.84%
138.67 26.78% 12.18%
1212.96 82.79
3.00% 3.67% 1.31% 2.82%
9.06%
135.13 26.75% 11.89%
1193.29 78.68
3.32% 4.10% 1.54% 2.99%
1.49%
2.98%
133.58 26.65% 11.80%
1166.57 74.50
4.92% 5.78% 3.06% 3.58%
2.05%
55.47% 17.58%
9.89%
136.69 26.35% 12.22%
1140.38 74.43
5.91% 6.82% 3.84% 3.33%
3.49%
54.00% 17.69%
2.50%
140.20 27.13% 12.13%
1122.22 71.95
8.40% 9.26% 5.75% 5.63%
4.21%
53.28% 17.54%
9.84%
140.00 28.57% 11.45%
1130.14 63.79
11.81% 12.35% 8.24% 6.51%
6.23%
52.71% 17.31%
-6.42%
-
1140.00 80.00
8.17% 8.77% 5.22% -1.38%
8.65%
53.55% 16.96%
0.60%
67.69 42.77% 3.76%
-
5.00% 6.00% 3.00% 3.00%
5.22%
57.73% 16.40%
150.67% 3.09%
11.24%
63.18 37.76% 3.98%
844.58 54.27
-
3.42%
56.70% 16.64%
76.46% 4.84%
-
75.35 31.61% 5.65%
781.11 40.30
1.61% 7.70% 4.32% 7.76%
-
51.58% 17.30%
58.53% 7.47%
12.50%
99.99 28.04% 8.42%
790.47 42.16
7.80% 13.63% 9.94% 5.72%
5.15%
-
69.19% 5.50%
1
127.25 26.44% 11.34%
899.65 55.06
9.48% 13.39% 8.66% 3.44%
10.11%
16.02% 17.44%
138.30% 3.20%
3
1050.62 66.95
9.71% 11.68% 6.41% 3.86%
8.88%
18.28% 16.31%
-
Private Consumption
1130.14 63.79
11.82% 12.53% 7.82% 5.64%
6.89%
27.87% 15.46%
-81.61% 1.50%
Private Investment
1140.00 80.00
8.17% 8.77% 5.22% -1.38%
8.26%
42.19% 15.43%
51.17% 11.19%
140.20 27.13% 12.13%
5.00% 6.00% 3.00% 3.00%
5.22%
55.57% 15.86%
47.87% 15.41%
140.00 28.57% 11.45%
3.42%
56.70% 16.64%
49.26% 13.24%
3
51.58% 17.30%
52.71% 10.03%
260.84% 2.67%
69.19% 5.50%
723.66% -472.59% 2.39% 2.07%
138.30% 3.20%
Real Currency Demand Currency to Debt Ratio (CUS/GBR) Government Debt Ratio Real Domestic Deposits Foreign Deposits (Us$ m) Real Interest Rates Government Bond Rate Domestic Lending Rate Domestic Deposit Rate Return on Foreign Deposits Real Cost of Capital Portfolio Composition Banks [ GBR / DCPT ] Firms [ DCPT / FFIN ] Bank Mark-up Banks' Return on Assets Notes [1] Cumulative change over baseline [2] Positive values imply real exchange rate depreciation [3] Percentage of GDP [4] No feasible solution possible
