an integrated approach to the study of reserve earning economies

AN INTEGRATED APPROACH TO THE STUDY OF RESERVE EARNING ECONOMIESÁNGEL GARCÍA BANCHS

University of Siena,Annual Meeting27-06-2008, Siena, Italy

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STRUCTURE OF THE PRESENTATION

1. Introduction (motivation and objectives).

2. Methodology: Stock-flow consistency approach to macroeconomics.

3. The Neoclassical versus the Post Keynesian model.

4. Features of my model − exogenous and endogenous variables.

5. Final remarks.

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1. INTRODUCTION (Motivation)

Interesting findings from previous work:

“International Monetary Asymmetries and the Central Bank”, forthcoming in Revista Investigación Económica, UNAM, Mexico, Jul-Sep 2008. (García, Mata and Nell, 2008).

The international monetary system is asymmetric.

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1. INTRODUCTION (Motivation) Interesting findings from previous work:

All national states can circulate domestically their own currencies but not all of them can do so internationally.

The world has become divided among reserve issuing and reserve earning economies.

This transformation occurred after WWII, when the elastic supply of US dollars arrived to replace the scarce supply of gold as international means of settlement.

5


Interesting findings from previous work: The quantity effect and the price effect.

The former means reserve earning economies must be concerned with the preservation of a minimum stock of foreign currency assets, while the latter implies they must be concerned with the stability of the foreign exchange rate.

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1. INTRODUCTION (Motivation) Interesting findings from previous work:

A strong supply side connection between the short-term rate of interest, the exchange rate, and the stock of foreign reserve assets of the central bank.

Different from traditional demand-side link.

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Reserve Issuing

Economies

Local CurrencyReserves

Reserve Earning

Economies

Foreign CurrencyReserves

Local CurrencyReserves

Interest Rate

FXRate

Interest Rate

8


Interesting findings from previous work:

Monetary policy is more flexible but less influential in reserve issuing economies, and less flexible but more influential in reserve earning ones.

The degree of interest rate exogeneity is much lower in reserve earning economies than in reserve issuing ones.

Caveat: International monetary asymmetries affect the behavior and balance sheet structure of the institutional sectors in the economy.

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1. INTRODUCTION (Objective)

Simulate changes in parameters so as to compare the two models: reserve earning and reserve issuing economies. Two different papers.

Firms (F), Households (H), Commercial Banks (B), the Central Bank (CB) the Government (G) and the Rest of the World (ROW).

How the rate of growth differs in the two economies. How stocks of wealth, flows of consumption and investment and prices evolve over time.

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2. METHODOLOGY: STOCK-FLOW CONSISTENCY APPROACH

Two views but same methodology:

The New Haven School, led by James Tobin at Yale University, in the US, and

The Cambridge School, led by Wynne Godley, in the UK (Godley and Lavoie, 2007).

The methodology is exactly the same. But the behavior of their models differ. The former is an orthodox approach and the latter is a Post Keynesian heterodox approach. (What variables are exog/endog?)

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Sectoral budget and system wide constraints:

“The fact that money stocks and flows must satisfy accounting identities in individual budgets and in an economy as a whole provides a fundamental law of macroeconomics analogous to the principle of conservation of energy in physics”.

Godley and Cripps (1983: p. 18)

2. METHODOLOGY: STOCK-FLOW CONSISTENCY APPROACH (Cont)

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Stock-flow norms which may be self-imposed or inflicted by other institutional sectors.

Appropriate use of lagged dynamics to make sure causes precede effects.

Several assets and rates of returns both, private and public, and short and long (Brainard and Tobin, 1968).

Financial and monetary policy is considered.


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Sectoral Budget constraint (Vertical):

System wide constraint (Horizontal N-1 sectors):

Balance sheet, revaluation and transactions matrices.

III Gains CapitalIncomeRegular Net WealthNet

i

i

I

1

WealthNet economy whole thein WealthNet

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F H B CB G ROW BalanceReal AssetsInventories S & D INFixed Capital S & D D D KLocal CurrencyFinancial AssetsCash D D D S D 0Bank Reserves D S 0Government Dep. in CB D S 0Current Account Deposits D D S D 0Saving Account Deposits D D S 0Government Bills D D D D S 0Central Bank Bills, CDs D S 0Bank Bills, CDs D D S 0Firm Bills, Comm. Paper S D D 0Government Bonds D D D S 0Corporate (Firm) Bonds S D D 0Credit Loans D D S 0Lender of Last Resort D S 0Firm Equities S D D 0

2.1 Balance Sheet Matrix of a REE

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F H B CB G ROW BalanceForeign CurrencyFinancial AssetsCash D D D D S 0Off-shore Deposits D D D D S 0Foreign Government Bills D D D D S 0Foreign Government Bonds D D D S 0Foreign Corporate Bonds D S 0Foreign Credit Loans D D S 0Foreign Equities D S 0Domestic Bank Reserves D S 0Domestic Deposits D D S D 0Domestic (Sovereign) Government Bonds D D D S D 0

Domestic Corporate Bonds S D D 0Domestic Credit Loans D S 0Balance VF VH VCB 0 VG Vrow -(IN+K)Sum 0 0 0 0 0 0 0

2.1 Balance Sheet Matrix of a REE (Cont)

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F H B CB G ROW BalanceReal AssetsFixed Capital + + + +Local CurrencyFinancial AssetsGovt. Bonds + + + - 0Firm Bonds - + + 0Firm Equities - + + 0Bank Capital + - 0Foreign CurrencyFinancial AssetsCash + + + + - 0Off-shore Deposits + + + + - 0Foreign Govt. Bills + + + + - 0Foreign Govt. Bonds + + - 0Foreign Firm Bonds + - 0

2.2 Revaluation Matrix of a REE

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F H B CB G ROW BalanceForeign CurrencyFinancial Assets(Continued)Foreign Loans - - + 0Foreign Equities + - 0Domestic Bank Reserves + - 0Domestic Deposits + + - + 0Domestic (Sovereign) Government Bonds + + - + 0

Domestic Corporate Bonds - + + 0Domestic Loans - + 0

2.2 Revaluation Matrix of a REE (Cont)

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Domestic Economy Row

BalanceFirms Households Banks CB Gov F, H, B, CB, G

Cur Cap Cur Cap Cur Cap Cur Cap Cur Cap Cur CapIncome processConsumption + - 0Govt. Exp. + - 0Fixed Invest. + - - - 0Inventory Acc. + - 0Exports + - 0Imports - + 0GDP -Y Y 0Income Tax - - - + 0Wages - + - 0Inventory Financing Cost - + 0

Entrepreneurial Profits - + + + - - 0

Bank Profits + - + 0CB Profits - + 0

2.3 Transactions Matrix of a REE

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BalanceFirms Households Banks CB GovF, H, B, CB, G

Cur Cap Cur Cap Cur Cap Cur Cap Cur Cap Cur CapRent TransfersLocal CurrencySA Deposits + + - 0Govt. Bills + + + + - 0CB Bills, CDs + - 0Bank Bills, CDs + + - 0Govt. Bonds + + + - 0Credit Loans - + 0LOR - + 0Foreign CurrencyOff-shore Deposits + + + + - 0Foreign Govt. Bills + + + + - 0

2.3 Transactions Matrix of a REE (Cont)

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BalanceFirms Households Banks CB Gov F, H, B,

CB, GCur Cap Cur Cap Cur Cap Cur Cap Cur Cap Cur Cap

Rent TransfersForeign CurrencyForeign Govt. Bonds + + - 0Foreign Corporate Bonds + - 0Foreign Credit Loans - - + 0Foreign Equities + - 0Domestic Bank Reserves + - 0

Domestic Deposits + + - + 0Domestic (Sovereign) Government Bonds + + - + 0


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CB, GCur Cap Cur Cap Cur Cap Cur Cap Cur Cap Cur Cap

Stock VariationsLocal CurrencyCash - - - + - 0Bank Reserves - + 0Govt. Dep. in CB + - 0CA Deposits - - + - 0SA Deposits - - + 0Govt. Bills - - - - + 0CB Bills, CDs - + 0Bank Bills, CDs - - + 0Corporate Bills + - - 0Govt. Bonds - - - + - 0Corporate Bonds + - - - 0Credit Loans + + - 0Loan Defaults + - 0Lender of Last R. + - 0Firm Equities + - - 0


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CB, Gov

Cur Cap Cur Cap Cur Cap Cur Cap Cur Cap Cur Cap

Foreign CurrencyCash -Δ -Δ -Δ -Δ +Δ 0Deposits abroad -Δ -Δ -Δ -Δ +Δ 0Foreign Govt. Bills -Δ -Δ -Δ -Δ +Δ 0Foreign Govt. Bonds -Δ -Δ +Δ 0Foreign Firm Bonds -Δ +Δ 0Foreign Loans +Δ +Δ -Δ 0Foreign Equities -Δ +Δ 0Domestic Bank Reserves -Δ +Δ 0Domestic Dep. -Δ -Δ +Δ -Δ 0Domestic Govt. Bonds -Δ -Δ +Δ -Δ 0Domestic Firm Bonds +Δ -Δ -Δ 0Domestic Loans +Δ -Δ 0Loan Defaults +Δ -Δ 0Sum 0 0 0 0 0 0 0


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Both share the same methodology, but:

In the Neoclassical model (NCM) agents maximize utility and profits. There is need and room for the rational expectations hypothesis.

In the Post Keynesian model (PKM), procedural rationality and adjustment to disequilibrium is assumed.

3. THE NEOCLASSICAL MODEL VERSUS THE POST KEYNESIAN MODEL

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In the NCM: perfect information assumption.

In the Post Keynesian model (PKM): generic uncertainty, liquidity preference, norms and targets which determine behavior.

For instance: inventories to sales ratio, bills and reserves to deposits, income to wealth, foreign reserves to imports, debt to GDP, foreign debt to exports, etc…although Tobin and some Neoclassical Keynesians have also used stock-flow norms.

3. THE NEOCLASSICAL MODEL VERSUS THE POST KEYNESIAN MODEL (Cont)

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The particular shape of expectations is not crucial, as any mistaken expectations lead to unexpected variations in inventories, money and wealth, signaling the need for a change in behavior.

Other features of the PKM: the principle of effective demand, imperfect competition, mark-up pricing, fixed technical coefficients, conflictive income distribution, the role of capacity utilization and retained profits, among many others


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But above all, the fact that money is endogenous.

For any good or asset, if quantities are endogenous, prices must be exogenous, and the converse.

Thus, if money is endogenous, the interest rate must be exogenous.

This will never be accepted by neoclassical economists, as their theory of prices and distribution would collapse.


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My model incorporates our previous findings, namely that international monetary asymmetries are largely responsible for determining the behavior and balance sheet structure of the institutional sectors in the economy.

327 equations. Why? The old answer is also the best one: the real world is complex, and computational power makes non-analytical results from simulations possible and amenable.

4. FEATURES OF MY MODEL − EXOG VS ENDOG VARIABLES.

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Firms (125 equations – 3 dummy variables).

Production and Real Investment Decisions:

Capital, intermediate and final goods are produced and imported, locally consumed and exported, and it is assumed there are inventories only in the latter case. Inventories act as a buffer stock (asset side).

Intermediate goods are required in accordance to fix technical coefficients.


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Production and Real Investment Decisions:

Investment in capital goods depends on an exogenous component and on capacity utilization.

Both “ig” and “kg” are locally produced and imported in some fixed proportions that are assumed to depend on the structure and degree of development of the economy, and not on relative prices.


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Costs of Production:

Inflation is a conflictive-claims process.

Workers aim at a real wage rate-target whose size varies continuously with average trend productivity and discontinuously with aggregate demand (e.g. with the employment rate), a sort of discontinuous Phillips curve with an inelastic segment. For simplicity, productivity is assumed to grow at an exogenous rate.


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Costs of Production:

The desired level of employment depends on average productivity and output. Yet, actual employment adjusts only partially towards target.

Unit costs of sales depend on the value of the wage bill and imports bill. Historic unit costs apply on in the case of final goods, as only those goods are accumulated in inventories.


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Pricing:

There is a total sales price, domestic price, export price and imports price for every good. Total sales prices are a mark-up over historic unit costs. Two alternative cases: Argentina, China?.

The ideal mark-up is that which would hypothetically generate the exact amount of profits required by firms to satisfy target retained earnings and dividend payoffs when realized profits are equal to planned profits.


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Financial Considerations:

Most of the investment expenditure is financed by profits, but the remaining part is financed by new issues of local and foreign currency debt and equities.

Firms structure their portfolio of assets and liabilities in accordance to interest rates and degrees of liquidity preference in local and foreign currency. Rates paid by corporate sector are market determined (endogenous).

Credit acts as a buffer stock (liability side).


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Households (48 equations).

Consumption and Real Investment Decisions:

Modigliani consumption function with propensities to consume out income (and consumer loans) and (expected) wealth.

Investment in real estate and durables also depends on income, loans and wealth.


35

Financial Investment Decisions:

Households receive wage payments from firms, banks and the government.

They place their savings across diverse lc and fc financial assets in accordance with their rates of interest and liquidity preference in lc and fc.


36

Financial Investment Decisions:

In line with the CRL, credit to households is constrained by income in a way which is inversely related to the real interest rate (the burden of debt).

Current account deposits are the buffer stock of households.


37

Banks (55 equations – 3 dummy variables).

Monetary and credit aggregates:

Cash is held in fixed proportion to CA and SA deposits.

Bank reserves within the central bank are held in fixed proportions to CA, SA and CDs.

Banks also hold a fraction in secondary reserves (PA bills).


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They cannot control directly the amount of bills they hold, as the latter is a residual the central bank accommodates once the demand for T-bills on the part of the other sectors has been satisfied.

Yet, they can indirectly influence the amount of bills they hold: in the short-run resorting to the discount window and in the long-run adjusting the rate they pay on deposit certificates, increasing it when the ratio is below target and reducing it when it is above.


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Banks accommodate holdings of (demand for) deposits, setting/paying a mark-up rate above the rate on PA bills.

They also accommodate the demand for credit in lc and fc on the part of F & H, setting the rate on loans as a spread over the deposit rate. The spread depends on CAR and profit targets.

Bills and (only temporarily) CB advances act as buffer stocks (on the asset and liability sides).


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Government (36 equations – 5 dummy variables).

Tax revenue (direct taxes paid by F, H, B, and indirect taxes over fg).

Nominal pure govt. expenditure: current (wage bill and purchases of final goods) and capital expenditure in infrastructure.

Both are initially assumed to grow at exogenous rates.


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The primary deficit plus interest payments determine the financial deficit.

Clearly, as money is endogenous and interest rates are exogenous, fiscal monetary expansions arising from government deficits must be absorbed: government may increase its fraction of deposits at CB, the latter may increase the legal rate of reserve requirements, and bills and bonds must be issued. Otherwise r↓, GIR↓, xr↑.

Govt. bonds are supplied on demand. But bills are supplied in accordance to cash flow requirements.


42

Short-term rate, GIR and foreign currency debt:


FCD

GIRWhole Economy

Public Admin

Flexible Non flexible

r

GIRWhole Economy

Public Admin

BGTBGBG rr 8z

TBGBG rr T

BGBG rr

Flexible Non flexible

ΔGIR>0ΔFCD>0

ΔGIR>0 ΔFCD<0

ΔGIR=0 ΔFCD=0

FCD to GDP or to exports

ratio

Inflation or loss of competitiveness

e.g. China e.g. China

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Foreign reserves and foreign currency debt act as buffer stocks.

So doing the government is able to stabilize the xr and preserve a minimum level of GIR. But all depends on the possibility to place more fc debt.

Why would a RIE (like the EU or the US) issue debt in fc? That would only be “una pazzia”.


44

Central Bank (36 equations – 5 dummy variables).

Accommodates the overall demand for base money.

Yet, it sets the rate on reserve requirement, adjusting to absorb/sterilize foreign currency inflows (e.g. China).

Holdings of GD within the CB are also accommodated.


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CB makes effective short-term rate by managing the supply of bills of the PA. Opposed to the case of RIEs, this is mainly done on the liability side.

The fact is the demand for T-Bills on the part of REE CBs is rather small, sometimes even negligible due to regulation or self-imposed restrictions.

Thus, in REEs base money is created through the increase in foreign reserves on the asset side. But it is destroyed on both the asset side and the liability side through reductions in foreign reserves and increases in CB bills and GDs within CB.


46

ROW (42 equations).

Foreign currency assets supplied by the ROW accommodate demand, except for the supply of bank loans to subsidiaries which are assumed to grow at the rate of exports. And, for simplicity, it is assumed domestic fc deposits held by non residents grow at the rate of imports.

Foreign interest rates are treated exogenously and domestic fc rates on government and corporate bonds are market-determined.


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My next paper will study the much simpler case of RIEs (like the US or the EU).

I will run diverse simulations for this model and the next model to compare the results in both artificial economies.

How the rate of growth differs in the two economies under different conditions (fc inflows and outflows)? How stocks of wealth, flows of consumption and investment and prices evolve over time, and many, many, other.

4. FINAL REMARKS.

48

APPENDIX

49

Domestic Economy Relations with the Rest of the World Balance

Firms Households Banks CB Gov F, H, B, CB, GovReal AssetsInventories IN INFixed Capital KF KH KG K

Local CurrencyFinancial AssetsCash CashF CashH CashB -CashCB CashG 0Bank Reserves BResB -BResCB 0Government Dep. in CB -GDCB GDG 0Current Account Deposits M1F M1H -M1 M1G 0Saving Account Deposits M2F M2H -M2 0Government Bills BG

F BGH BG

B BGCB -BG 0

Central Bank Bills, CDs BCBB -BCB 0

Bank Bills, CDs BBF BB

H -BB 0Firm Bills, Comm. Paper -BF BF

H BFB 0

Government Bonds BLGF*pblG BLG

H*pblG BLGB*pblG -BLG*pblG 0

Corporate (Firm) Bonds -BLF*pblF BLFH*pblF BLF

B*pblF 0Credit Loans -LF

B -LHB LB 0

Lender of Last Resort -LB LCB 0Firm Equities - eF*peF eF

H*peF eFrow*peF 0

Bank Capital OFBH - OFB

H 0

Table 1. The Balance Sheet Matrix of a REE

50


Firms Households Banks CB Gov F, H, B, CB, Gov

Foreign CurrencyFinancial AssetsCash xr*$CashF xr*$CashH xr*$CashB xr*$CashCB -xr*$Cashrow 0Off-shore Deposits xr*$Mrow

F xr*$MrowH xr*$Mrow

B xr*$MrowCB -xr*$Mrow 0

Foreign Government Bills xr*$BG-rowF xr*$BG-row

H xr*$BG-rowB xr*$BG-row

CB -xr*$BG-row 0

Foreign Government Bondsxr*$BLG-row

F

*$pblG-row

xr*$BLG-rowH

*$pblG-row

xr*$BLG-rowB

*$pblG-row

-xr*$BLG-row

*$pblG-row0

Foreign Corporate (Firm) Bonds

xr*$BLF-rowH

*$pblF-row

-xr*$BLF-row

*$pblF-row0

Foreign Credit Loans -xr*$LFrow -xr*$LB

row xr*$Lrow 0

Foreign Equitiesxr*$erow

H

*$perow

-xr*$erow

*$perow0

Domestic Bank Reserves xr*$BRes -xr*$BRes 0Domestic Deposits xr*$MB

F xr*$MBH -xr*$MB xr*$MB

row 0Domestic (Sovereign) Government Bonds

xr*$BLGF

*$pblG

xr*$BLGH

*$pblG

xr*$BLGB

*$pblG

-xr*$BLG

*$pblG

xr*$BLGrow

*$pblG0

Domestic Corporate (Firm) Bonds

-xr*$BLF

*$pblF

xr*$BLFH

*$pblF

xr*$BLFrow

*$pblF0

Domestic Credit Loans -xr*$LFB xr*$LB 0

Balance VF VH 0 VCB VG Vrow -(IN+K)Sum 0 0 0 0 0 0 0

Table 1. The Balance Sheet Matrix of a REE (Continued)

51


Firms Households Banks CB Gov F, H, B, CB, GovReal AssetsFixed Capital Δp*k- Δp*k-1

H Δp*k-1G Δp*k-1

Local CurrencyFinancial Assets

Government Bonds ΔpblG*BLG- ΔpblG*BLG-1H ΔpblG*BLG-1

B -ΔpblG*BLG-1 0

Firm Bonds -ΔpblF*BLF- ΔpblF*BLF-1H ΔpblF*BLF-1

B 0Firm Equities -ΔpeF*eF-1 ΔpeF*eF-1

H ΔpeF*eF-1row 0

Bank Capital ΔOFBH -ΔOFB

H 0Foreign CurrencyFinancial Assets

Cash Δxr*$Cash- Δxr*$Cash-1H Δxr*$Cash-1

B Δxr*$Cash-1CB -Δxr*$Cashrow-1 0

Off-shore Deposits Δxr*$Mrow- Δxr*$Mrow-1H Δxr*$Mrow-1

B Δxr*$Mrow-1CB -Δxr*$Mrow-1 0

Foreign Gov Bills Δxr*$Brow- Δxr*$Brow-1H Δxr*$Brow-1

B Δxr*$Brow-1CB -Δxr*$Brow-1 0

Foreign Gov Bonds

$BLG−row-

*[(Δxr*$pblG−row)

+(Δ$pblG−row*xr-1)]

$BLG−row-1H



-$BLG−row-1



0

Foreign Firm Bonds

$BLF−row-1H

*[(Δxr*$pblF−row)

+(Δ$pblF−row*xr-1)]

-$BLF−row-1

*[(Δxr*$pblF−row)

+(Δ$pblF−row*xr-1)]

0

Table 2. Revaluation Matrix of a REE

52


Firms Households Banks CB Gov F, H, B, CB, GovForeign CurrencyFinancial Assets(Continued)Foreign Loans -Δxr*$LF-1

row -Δxr*$LB-1row Δxr*$L-1

row 0

Foreign Equities

$erow-1H

*[(Δxr*$perow)

+(Δ$perow*xr-1)]

-$erow-1

*[(Δxr*$perow)

+(Δ$perow*xr-1)]

0

Domestic Bank Reserves

Δxr*$BRes-1 -Δxr*$BRes-1 0

Domestic Deposits

Δxr*$MB- Δxr*$MB-1H -Δxr*$MB-1 Δxr*$MB, -1

row 0

Domestic (Sovereign) Government Bonds

$BLG-

*[(Δxr*$pblG)

+(Δ$pblG*xr-1)]

$BLG-1H

*[(Δxr*$pblG)

+(Δ$pblG*xr-1)]

-$BLG-1

*[(Δxr*$pblG)

+(Δ$pblG*xr-

1)]

$BLG-1row

*[(Δxr*$pblG)

+(Δ$pblG*xr-1)]

0

Domestic Corporate (Firm) Bonds

-$BLF-1

*[(Δxr*$pblF)

+(Δ$pblF*xr-1)]

$BLF-1H

*[(Δxr*$pblF)

+(Δ$pblF*xr-1)]

$BLF-1row

*[(Δxr*$pblF)

+(Δ$pblF*xr-1)]

0

Domestic Loans -Δxr*$LF-1B Δxr*$L-1

B 0

Table 2. Revaluation Matrix of a REE (Continued)

53

Domestic Economy RowBalanceFirms Households Banks CB Gov F, H, B, CB, Gov

Cur Cap Cur Cap Cur Cap Cur Cap Cur Cap Cur CapIncome processConsumption C -C 0Gov Expenditures G -G 0

Fixed Investment I -IF -IH -IG 0Inventory Acc. ΔIN -ΔIN 0Exports X -X 0

Imports

-xr*IMC-

xr*IMIG -xr*IMK

xr*IMC+xr*IMIG +xr*IMK

0

GDP -Y Y 0Income Tax -TF -TH -TB T 0Wages -WBF WB -WBG 0Inventory Financing Cost

-rL-1

*IN-1

rL-1

*IN-10

Entrepreneurial Profits

-FF FUFF

FDFH

+rBF-1

*BF-1H

+BLF-1H

+xr*$BLF-1

H

rBF-1*BF-1B

+BLF-1B

+rL-1*[LF-1B

-NPL- IN-1]-rM-1*M2-

-rBB-1*BB-

+xr*[$rL-1

B*$LF-1B

-$rM-1B*$MB-1

F]

-rBG-1

*BG-

-BLG-

-xr*$BLG-

xr*[$BLF-1

row -$rM-1

row

*$Mrow-

-$rBG,row-1

*$BG,row-

-$BLG,row-1F]

0

Bank Profits FDBH -FB FUB

B 0CB Profits -FCB FCB

G 0

Table 3. Transaction Matrix of a REE

54


BalanceFirms Households Banks CB Gov F, H, B, CB, Gov

Cur Cap Cur Cap Cur Cap Cur Cap Cur Cap Cur CapRent TransfersLocal CurrencySaving Account Deposits

rM-1

*M2- rM-1

*M2-1H

-rM-1

*M2-1 0

Government BillsrBG-1

*BG-

rBG-1

*BG-1H

rBG-1

*BG-1B

rBG-1

*BG-1CB

-rBG-1

*BG-10

Central Bank Bills, CDs

rBCB-1

*BCB-1B

-rBCB-1

*BCB-10

Bank Bills, CDsrBB-1

*BB-

rBB-1

*BB-1H

-rBB-1

*BB-10

Government Bonds

BLG- BLG-1H BLG-1

B -BLG-1 0

Credit Loans-rL-1

*LH-1

rL-1

*LH-10

Lender of Last Resort

-rLCB-1

*L-1

rLCB-1

*L-1CB 0

Foreign Currency

Off-shore Deposits

xr*$rM*-1

*$Mrow-

xr*$rM*-1

*$Mrow-1H

xr*$rM*-1

*$Mrow-1B

xr*$rM*-1

*$Mrow-1CB

-xr*$rM*-1

*$Mrow-1

0

Foreign Government Bills

xr*$rB*-1

*$Brow-

xr*$rB*-1

*$Brow-1H

xr*$rB*-1

*$Brow-1B

xr*$rB*-1

*$Brow-1CB

-xr*$rB*-1

*$Brow-1

0

Table 3. Transaction Matrix of a REE (Continued)

55


BalanceFirms Households Banks CB Gov F, H, B, CB, Gov

Cur Cap Cur Cap Cur Cap Cur Cap Cur Cap Cur CapRent TransfersForeign CurrencyForeign Government Bonds

xr*$BLG-row-

xr*$BLG-row-1

H-xr

*$BLG-row-10

Foreign Corporate (Firm) Bonds

xr*$BLF-row-1

H-xr

*$BLF-row-10

Foreign Credit Loans

-xr*$rL*-1

*$LF-1row

-xr*$rL*-1

*$LB-1row

xr*$rL*-1

*$LB-1row

0

Foreign Equitiesxr

*$FDF-rowH

-xr*$FDF-row

0


xr*$rB*-1

$BRes

-xr*$rB*-1

$BRes0

Domestic Deposits

xr*$rM-1

*$M-

xr*$rM-1

*$M-1H

-xr*$rM-1

*$M-1

xr*$rM-1

*$M-1row

0

Domestic (Sovereign) Government Bonds

xr*$BLG-

xr*$BLG-1

H-xr

*$BLG-1

xr*$BLG-1

row 0


56


Cur Cap Cur Cap Cur Cap Cur Cap Cur Cap Cur CapStock VariationsLocal CurrencyCash -ΔCashF -ΔCashH -ΔCashB ΔCashCB -ΔCashG 0Bank Reserves -ΔBResB ΔBResCB 0Govt. Dep. in CB ΔGDCB -ΔGDG 0Current Account Deposits -ΔM1F -ΔM1H ΔM1 -ΔM1G 0

Saving Account Deposits -ΔM2F -ΔM2H ΔM2 0

Govt. Bills -ΔBGF -ΔBG

H -ΔBGB -ΔBG

CB ΔBG 0Central Bank Bills, CDs

-ΔBCBB ΔBCB 0

Bank Bills, CDs -ΔBBF -ΔBB

H ΔBB 0Firm Bills, Comm. Paper

ΔBF

÷(1+ΩbF)-ΔBF

H

÷(1+ΩbF)-ΔBF

B

÷(1+ΩbF) 0

Govt. Bonds-ΔBLG

F

*pblG

-ΔBLGH

*pblG

-ΔBLGB

*pblG

ΔBLG

*pblG

-ΔBLGrow

*pblG0

Corporate (Firm) Bonds

ΔBLF

*pblG

÷(1+ΩblF)

-ΔBLFH

*pblG

÷(1+ΩblF)

-ΔBLFB

*pblG

÷(1+ΩblF)

-ΔBLFrow

*pblG

÷(1+ΩblF)0

Credit Loans ΔLFB ΔLH

B -ΔLB 0Loan Defaults NPL -NPL 0Lender of Last R. ΔLB -ΔLCB 0

Firm Equities ΔeF*peF -ΔeFH*peF

-ΔeFrow

*peF0


57


Cur Cap Cur Cap Cur Cap Cur Cap Cur Cap Cur CapForeign Curr.

Cash -xr*Δ$CashF -xr*Δ$CashH -

xr*Δ$CashB-

xr*Δ$CashCB

xr*Δ$Cashro

w0

Deposits abroad

-xr*Δ$MrowF -xr*Δ$Mrow

H -xr*Δ$MrowB -

xr*Δ$MrowCB xr*Δ$Mrow 0

Foreign Govt. Bills

-xr*Δ$Brow

F-xr

*Δ$BrowH

-xr*Δ$Brow

B-xr

*Δ$BrowCB

xr*Δ$Brow

0

Foreign Govt. Bonds

-xr*Δ$BLG-row

F

*$pblG-row

-xr*Δ$BLG-row

H

*$pblG-row

xr*Δ$BLG-row

*$pblG-row

0

Foreign Firm Bonds

-xr*Δ$BLF-row

H

*$pblF-row

xr*Δ$BLF-row

*$pblF-row

0

Foreign Loans xr*Δ$LFrow xr*Δ$LB

row -xr*Δ$Lrow 0Foreign Equities

-xr*erowH

*Δ$perow

xr*erow

*Δ$perow0


-xr*Δ$BRes

xr*Δ$BRes 0

Domestic Dep. -xr*Δ$MBF -xr*Δ$MB

H xr*Δ$MB -xr*Δ$MBrow 0

Domestic Govt. Bonds

-xr*Δ$BLGF

*$pblG

-xr*Δ$BLGH

*$pblG

xr*Δ$BLG

*$pblG

-xr*Δ$BLG

row

*$pblG

0

Domestic Firm Bonds

xr*Δ$BLF

*$pblF

-xr*Δ$BLF

H

*$pblF

-xr*Δ$BLF

row

*$pblF

0

Domestic Loans

xr*Δ$LFB -xr*Δ$LB 0

Loan Defaults NPL -NPL 0Sum 0 0 0 0 0 0 0


an integrated approach to the study of reserve earning economies

Documents

means reserve

previous work

international monetary

foreign exchange rate

shortterm rate

rate exogeneity

rate of growth

monetary policy