A Method for Macroeconomic Consistency in Current and...
Transcript of A Method for Macroeconomic Consistency in Current and...
Policy, Planning, and Research
WORKING PAPERS
I Macroeconomic Adjustmentand Growth
Country Economics DepartmentThe World BankDecember 1989
WPS306
A Methodfor Macroeconomic
Consistencyin Current and Constant
Prices
Ali Khadrand
Klaus Schmidt-Hebbel
An accounting method for showing budget flow and stockrelations, in current and constant prices, for a six-sector econ-omy.
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Plc,Planning, and Research
Mareconomic Adjustmentand GrowthI
Khadr and Schmidt-Hebbel extend earlier work real holdings and (b) capital gains and losses dueon cunent-price budget identities to treat con- to inflation and exchange rate depreciation. Thisstant-price flow relations. makes possible a distinction between savin.'
and a changr, in real wealth, or "adjusted"This introduces relative prices and constant- savings.
price values for all relevant output and aggregatedemand components and permits a distinction In Working Paper 310, Khadr and Schmidt-between real variables and relative price Hebbel apply the framework to data on Zim-changes. babwe for 1981 and 1987.
It also permits breaking the changes in assetand liability holdings down into (a) changes in
This paper is a product of the Macroeconomic Adjustment and Growth Division,Country Economics Departnient. Copies are available free from the World Bank,1818 H Street NW, Washington DC 20433. Please contact Susheela Jonnakuty, roomNI 1-039, extension 61769 (60 pages with tables).
The PPR Working Paper Series disseminates the findings of work under way in the Bank's Policy, Planning, and Research.romplex. An objective of Cie series is to get these findings out quickly, even if presentations are less than fully polished.rhe findings, interpretations, and conclusions in these papers do not necessarily represent official policy of thc Bank.
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TABLE OF CONTENTS
Page
1. INTRODUCTION ........................................................ 1
2. A METHODOLOGY FOR MACROECONOMIC CONSISTENCY ........................ 2
2.1 Flow Budget Constraints in Current Prices ..... ............... 2
2.2 Flow Budget Constraints in Constant Prices ..... .............. 9
2.3 Balance Sheets, Net Wealth and Savings ....................... 28
2.4 Intertemporal Budget Constraints ............................. 36
2.5 Implications of Macroeconomic Consistency for Macro
Analysis and Model Building ................................. 39
3. APPLICATION TO ZIMBABWE ............................................ 40
3.1 Macroeconomic and Financial Flows in Current Prices .... ...... 41
3.2 Macroeconomic and Financial Flows in Constant Prices ......... 42
3.3 Balance Sheets and Real Wealth ............................... 50
4. CONCLUDING REMARKS . ................................................ 54
REFERENCES.55R FER N E .................... .. . . . . . . . . . . . . . . . . . . .. 5
APPENDIX 1 .56
This paper has benefited from many useful comments by Vittorio Corbo, WilliamEasterly, John Holsen, Gary Hyde, Jacques Polak, Michael Walton and participantsat the World Bank Seminar on Macroeconomic Adjustment and Growth, Annapolis,April 24-26, 1989. Efficient research assistance provided by Perla Aizenman andAnna Muganda is gratefully acknowledged.
1. INTRODUCTION
Macroeconomic consistency can be understood in different ways. At the
simplest level, consistency refers to the satisfaction of within-period and/or
intertemporal budget constraints. Macroeconomic consistency is this sense can
be viewed as the set of restrictions imr-osed by the simultaneous satisfaction
of budget constraints for all sectcrs of the economy. A wider meaning of
macroeconomic consistency pertains to the restrictions that result from both
budgetary rel&tions and behavioral structures. General equilibrium macroeconomic
models which explicitly combine behavioral and accounting relations are
consistent in this second sense.
This paper develops a framework for macroeconomic consistency in the first
sense. It provides an accoutnting model for nominal and real budgetary flow and
stock relations for any economy with reasonable data availability. An
application to Zimbabwe illustrates the scope and the usefulness of the
methodology.
A consistent macroeconomic accounting framework is required for both
financial programming (which often involves few or no behavioral equations) and
for any model-building effort that involves additional structure and behavior.
Since it lacks any behavioral structure, the framework constitutes a minimum
accounting skeleton that integrates the traditional national income, fiscal,
monetary, and balance of payments accounts into a basic grid provided by source-
and-use-of-fund tables or budget constraints for an appropriate number of
sectors.
The consistency model is derived in section 2. The integration of current
price flow budget constraints for six sectors in subsection 2.1 is based on
preceding wo;k on nominal budget flows by United Nations (1968), Turnovsky
(1977), Host-Madsen (1979), Marshall and Schmidt-Hebbel (1988), Holsen (1989)
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and Easterly (1989).
The framntwork is extended significantly in subsection 2.2 to integrate
real national income variables with other budgetary variables using a common
deflator. This procedure implies distinguishing, on the expenditure side,
between real aggregate demand components and relative price changes, and on the
financing side between changes in real asset/liability holdings and capital
gains and losses stemming from inflation and exchange rate devaluation.
Balance sheets and net wealth definitions, based on previous work by Crouch
(1972), Meyer (1975), Turnovsky (1977) and Marshall and Schmidt-Hebbel (1988).
are presented in subsection 2.3. These are a prerequisite for stock or
intertemporal. budget constraints derived subsequently (subsection 2.4), which
necessarily involve current expectations of future flow variables. A discussion
of the implications of macroeconomic consistency for model building concludes
this section.
An application of the consistency framework to the Zimbabwean economy for
1981 and 1987 is presented in section 3. This is a simplified three-sector
version of a six-sector application to Zimbabwe presented by Khadr and Schmidt-
Hebbel (1989). Section 4 concludes.
2. A METHODOLOGY FOR MACROECONOMIC CONSISTENCY
2.1 Flow Budget Constraints in Current Prices
In the following, the flow budget constraints for the main sectors of the
economy are presented.
3
The sectors considered here are two non-financial public sectorr (central
government, and a consolidated public enterprise and local government sector),
two financial sectors (the central bank and the banking sector), the non-
financial private sector, and the foreign sector.
Sector disaggregation is based on factor ownership and sector behavior.
This leads naturally to a distinction among the private, public, and external
sectors. In addition the financial and non-financial sectors are separated due
to the importance of financial and monetary variables in the economy as well as
their relation to balance of payments variables.
The distinction within the public sector is justified on grounds of data
availability (and possibly differing behavior) for the central government budget
in comparison to public enterprises and local government, which are lumped into
a single account. A distinction between deposit money banks and the central
bank is desirable due to their different roles and links with the balance of
payments and the public sector. Obviously they can be easily consolidated into
a single monetary system. Alternatively the central bank, central government,
and public enterprises and local government can be integrated, as in section 3
below, into a consolidated public sector, which often is the relevant aggregation
for analyzing the macroeconomic impact of the public sector on the main
macroeconomic aggregates.1
The private sector consolidates households and firms into one sector, an
assumption which can be lifted subject to data availability and analytical
lFor a detailed derivation of the consolidated public sector budget basedon four public subsectors (general government, public enterprises, central bank,and other public financial institutions see Marshall and Schmidt-Hebbel (1988).
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requirements. Section 3 consolidates the private and banking sectors into one
financial/non-financial private sector.
The two accounting principles for recording transaction flows are the cash
basis and the accruals basis.2 Balance of payments, national income, and
monetary statistics are normally on an accruals basis, while government
statistics are recorded on a cash basis.3 For consistency, the budget
constraints developed below, which integrate data from the above-mentioned four
sources, assume a common accounting principle, the accruals basis.
An imporLant category of accrued but unrealized flows are capital gains
and losses on liabilities and assets. While unrealized capital gains and losses
are not considered in the flow budget constraints, the real flow budget
constraints in section 2.2 below decompose deflated changes in nominal asset and
liability holdings into the sum of changes in real holdings and the capital
gains and losses due to inflation and exchange rate devaluation. By contrast,
real balance sheet accounts in section 2.3 only consider the changes in the
stocks of real assets and liabilities, hence implicitly subtracting the capital
gains and losses from the real changes in nominal holdings.
The budget constraints represent with the basic identity between sources
and uses of funds for each sector. The presentation here separates current and
2For a discussion of accounting principles followed by -.croRconomic andfinancial statistics and their differences see Host-Madsen (1979), particularlypp. 7-12.
3Standards for the preparation of statistics in these four areas have beenset by United Nations and the International Monetary Fund. A comprehensive guidefor the compilation of no.tional income accounts is United Nations (1968). TheIMF has set the international standards for the three remaining sets of accountsin its 1948 Balance of Payments Manual (revised subsequently), and in itsperiodical publication of the Government Finance Statistics Yearbook and theInternational Financial Statistics.
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capital account sources and uses, defining sector saving as the wabove the line'
or current account excess of sources over uses of funds. This is equal also to
the 'below the line' or capital account ezce s of uses over sources of funds.
Two asset categories are distinguishied ir the capital account: real assets
or physical capital (which has no offsetting liability) and financial assets,
which are claims on another entity. While the changes in physical assets are
written in terms of flows (capital stocks are not considered explicitly in
sections 2.1 - 2.2), changes in financial assets and liabilities are written as
first differences of the corresponding stocks.
A simplifying assumption made throughout the paper, which reflects data
limitations in most applications, is the absence of any current account
transactions of the two financial sectors. This implies that the net wealth or
equity of both the central bank and the banking sector are zero.
To start with, flow budget constraints are written in discrete time4 and
in current prices, i.e., in nominal domestic currency units. Flow variables
refer to the corresponding discrete period (t), while stock variables refer to
end of period (t, or t-l) instants. In order to link subsequently the budget
constraints to real aggregate demand variables, nominal expenditure on these
demand components are separated into the corresponding price and quantum
4Discrete-time versions are required for any empirical implementation, asflow variables are recorded for discrete time periods, and not as instantaneousrates. On the other hand, continuous-time models are more convenient forcarrying out steady state and stability analyses due to the higher tractabilityof differential equations as compared to difference equations. Additionaldrawbacks of discrete-time specifications are first, that the stock-flowdistinction is obscured as shown by May (1970), and second, that they assume aperfect synchronization of all decisions. For a further discussion of thedifferences between discrete and continuous time specifications see Turnovsky(1977), chap. 3.
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variables. All prices introduced in this subsection, including exchange and
interest rates, are defined as period averages.
Identities (1) and (2) pertain to the central government (G) and public
enterprises and local government (PL), identities (3) and (4) to the central
bank (CB) and the banking sector (BS), identity (5) to the non-financial private
sector (PR), and identity (6) to the foreign sectort
t t PRt Et NTRGOt pCt cGt GTRt t GSUBt+ i6t GKTR -+
7t G t1 3t BGt-l - E it BFGt-l SGt P int ++ (GKTR - GKTRt1 ) + tGKPLt - GKPL t-) Gt Gt-
- (CBS Gt - CBSGt1) - (BGt - BGtl) Et (BFGt BFGt-l t KTGt
(2) PLFYt + GSUBt - GSUBt - i7t GKPL - i BPLt-1 - Et it BFPLt-1
_ S _ p in - (GKPL -GKPL ) - (B - B ) - (DC _PLt IT PLt-l t t-l PLt PLt-l PLt
CpPLt-1 (CBSPLt PCBSPLt- Et (BFPLt PLt-l
(3) 0 5 S CBt (DCGt DCGtl) + (DCPLt - DCPLt1) + (DCBSt DCBSt ) +
+ Et (RCBt RCBt-l) - (HBSt - HBSt1) (DBBSCBt DBBSCBt-)
-(H _PRt -HPRt-1) - (DBPRcBt - DBPRcBt1) - Et ( NCBt - NFBt-)
(4) 0 5 S S (CBSGt CBSGt 1) + (CBSPLt_ CBSpLt1) + (HBSt BSt-1)+
+ (DBBScBt - DBBSCBt1) + (CBSPRt - CBS Pt-I) + Et (%St RSt-
- (DCBSt -DCBSt_l) - (DE?PRt - DEPPRt-1) - (Q!Okt - QMONti1)
- Et (NFBBSt - NFBBSt-l)
(5) PRFYt + GTRt + Et NTRPRt + Et WRENt PCt cPRt - TDPRt - Et rrt FKt_j +
i3t BGt-l 8t BPLt-1 Et t RPRt-l 6t KTRt-l t t PRt l
- PRt PIT inPRt + (H PRt ~l HPRt-l) + (DBPR CBt- DBPR CBt-I +
7
- (DEPPRt - DEPPRtl) + (QMONt - QMONNt-) + (3Gt - BGt-l) ( PLt
-B )PLt-I + Et (RPRt - RPRt l) - (GRTRt - GKTRt_,) - (DPRt - DCPRt l)
- (CBSpRt-1 - CBSPRt1 ) - Et(FKt - FKt_l) - Et (BPPRt - BFPRt-1)
(6) - Pxt xgnfst + PMINTt mintPRt + PMCt (OCGt + mCPRt ) +
+ I (PRt +miGt + mi ) - E (NTRGO + NTRPR + WREM ) +
+ E rrt FKt + E i (BFGtl + PLtl R+B PR t t1 t tPLtt-l PRt-1 PRt-1) SFt
E KTGt + Et (FKt - FKt_1) + Et ((BFGt BFGt-l + (BPPLt
_ BFPLt + (BFPRt B PRt-1) + (NCBCBt CNFBCBt ) BSt
- NFBBSt )) - Et((RCBt - RCBt-)) + (RBSt - RBSt- 1 ) + RPRt - RPRt-l))
where sectors are denoted by the acronyms introduced above and variables are
defined as follows:
FY is gross factor income, TI is indirect taxes, NTR is net foreign
transfers, c is real consumption expenditure, GTR is government transfers to PR,
GSUB is government subsidies to PR channeled via PL, GKTR is government loans
to PR, GKPL is government loans to PL, B is government bonds or domestic debt,
BF is foreign bonds or foreign debt, KTG is foreign capital transfers to the
government, S is saving, in is real gross investment expenditure, DC is domestic
credit of CB, CBS is credit of the BS, R is foreign reserves and asset holdings,
H is base money, DB is deposits at the CB, NFB i.s net foreign debt of financial
institutions, DEP is deposits at BS, QHON is quasi-money held by PR, WREM is
worker remittances from abroad to PR, FK is the foreign-owned capital stock,
xgnfs is real exports of goods and non-factor services, mint is real imports of
intermediate goods, mc is real consumer goods imports, and mi is real capital
goods imports. Imports refer to both goods and non-factor services.
8
Price variables are defined he followss' E is the nominal exchange rate
(which premultiplies all variables defined in nominal foreign currency units),
PC is the consumption deflator, PI is the investment deflator, PX is the domestic
currency deflator for exports, PMINT, PM,, PMC are the domestic currency
deflators for imported intermediate, consumption and investment goods, ij is the
nominal interest rate associated with the jth asset or liability5, i* is the
nominal foreign interest rate, and rr is the nominal rate of profit on foreign-
owned capital.
Equations (1) - (6) are obviously not independent of each other. If one
takes into account the income-( )rnditure identity, any sector's budget equation
is equal to the sum of the other five sectors' budget flow constraints. For
instance, the external sector or balance of payments equation (6) is equal to
the sum of all domestic sectors' budget equations (1) - (5) and the basic
macroeconomic income-expenditure (or national accounts) identity, namely
(7) GFYt + PLFYt + PRFYt + TIt - SUBt ' P Yt - pct (CGt +cPRt) +
PINt(in Gt + in PLt+ in PRt) + Pxt xgnfs PMINTt mint -
- PHC (mcGt+ mcPRt) - PMIt(miGt+ miPLt + mi PRt
where y is real GDP and P is the GDP deflator.
A compact representation of the interrei.cion between nominal budget
constraints (1) - (7) is given in summary matrix 1, based on Easterly (1989).
This presents in a comprehensive format the macroeconomic and financial flows
5For notational convenience digits were used for j instead of thecorresponding asset's or liability's letter identification.
9
corresponding to these equetions. The matrix combines the source-and-use-of-
fund presentation and the social accounting matrices consistent with national
income accounts. Each matrix can be divided into four submatrices. The upper
left submatrix represents the current acount transactions, while the two right-
hand submatrices reflect the capital account transactions. The upper-right
submatrix shows investment and the lower-right financial asset transactions.
The lower left submatrix show. the r:aving of each sector as a link between the
current and the capital account transactions. This also allows one to identify
total sector sources and uses of funds. Total domestic saving and investment
are explicitly equated in the lower right-hand corner of the matrix. The
nartional accounts link of GDP to national income and aggregate expenditure is
established in the first row and column of the matrix.
2.2 Flow Budget Constraints in Constant Prices
To derive budget constraints in constant prices, a basic fact to recall
is that a budget constraint in real terms is not linearly independent of the
corrresponding budget constraint in nominal terms, i.e., the former must ba
equal to the latter divided by a common deflator. This paper uses the GDP
deflator for this purpose.
However, after dividing equations (1) - (7) by the average-period GDP
deflator (P), the deflated expenditure on each aggregate demand component is
separated into the real value or quantum component and the relative price change.
On the capital account side, the deflated changes in nominal asset and liability
holdings are separated i!nto the changes in real asset and liability holdings and
the capital losses and gains due to inflation and exchange rate appreciation.
10
For instance, the deflated government consumption expenditure is simply
decomposed into constant price or real consumption (equal to consumption
expenditure valued at unit base-period prices) and the relative price change of
consumption goods, versus nationally produced goods as follows:
(8) (PCt cGt) l Pt = cGt + ((Pct - Pt)/Pt) cGt
Now let us focus on decomposing the deflated changes in the nominal
holdings of a given asset (or liability) into the sum of the change in real
asset (or liability) holdings and the capital loss (or gain) due to domestic
inflation and exchange rate appreciation. First note that asset and liability
holdings are defined as holdings at end-of-period instants. Therefore
corresponding end-of-period domestic price indices and nominal exchange rates
need to be introduced.6 Defining Pet, Pet_,, Eet, and Eet-, as the relevant
end-of-period domestic price indices and nominal exchange rates, decompose (for
example) for instance the deflated (or average base-period valued) changes in
nominal domestic and foreign government debt holdings as follows:
(9) Gt Gt-l (BFGt -B Gtl
tt
B B ~~p - Pe BtPe- BG EetBGt Gt-l t tl Gtl + t t Gt t
6The distinction between period-average and end-of-period deflators,introduced here, is not drawn in the six-sector applica.ion of our methodologyto Zimbabwe (Khadr and Schmidt-Hebbel, 19P89).
ii
etEte 1EeiE~ tPet EetPet BFGt_,) (1 Ee_, ) Pt BFGt-l (Pr -ij 1) P BFGt
t-l t t~~~1
(o bGt-) + (f rt ) b + b +
+ (bfGt bfGt-l) + ( 1 + "it) bfGtl + ( + e2t) bfGt
where lower-case asset holdings denote real holdings valued at end-of-period
prices:
bBG BG- bfEet BGt Pe1Gt-l Pet bfGt ' P Gtbt Pet Pet1
Eetl1
Gt-l Pe BFGt-t-l
and 'first-half-term' and *second-half-term, inflation and nominal devaluation
rates are defined as:
lt Pet - Pe t t Pe Pt fit Pe 'r2t P -Pt-1 Pt
=Et - Ee ti1 Ee -E t___ _1 _ t t
Domestic government debt accumulation is decomposed in eq. (9) into the
sum of the increase in real (constant) price domestic debt and the government's
capital gain from domestic inflation which erodes the real value of domestic
debt. At the same time, foreign government debt is decomposed by (9) into the
sum of the increase in real foreign debt and the government's capital gain due
12
to the real exchange rate appreciation (ir - C > 0) which erodes the real value
(in constant domestic currency prices) of foreign debt.
This decomposition of deflated expenditure flows (as shown by eq. (8)) and
changes in asset and liability holdings (as demonstrated by eq. (9)) is carried
out for every current and capital transaction. Defining the corresponding real
expenditure flows and real financial asset and liability holdings by lower case
letters, tables 1 - 6 present the six flow budget constraints in constant prices
by uses and sources of funds. Again, a distinction is drawn between the current
and capital accounts. Note that in addition to the interest and non-interest
parts of the current account (which comprise the current account of nominal
budget flows), the relative price changes of the corresponding aggregate demand
componerts now appear. In the capital account, the investment relative price
change appears as a new item. Finally, items in the capital account are the
capital gains and losses in real financial wealth stemming from domestic
inflation and nominal eschange rate devaluation.
The interrelations between real budget flows are presented in a compact
form in matr!.x II. It extends the preceding matrix in two dimensions. First,
the national accounts and external sector lines are expanded to consider both
real aggregate demand variables and their price changes relative to the GDP
deflator. Second, deflated changes in asset (liability) holdings in the lower
right submatrix are broken down into changes in real asset (liability) holdings
and capital losses (gains) due to domestic inflation or real exchange rate
13
TABLE 1SOURCES AND USES OF FUNDS: CENTRAL GOVERNMENT
(In real terms)
ACCOUNTS SOURCES USES
1. Current Account
1.1 Non-Interest GFYt /Pt cGt
TI /Pt GTR /PtTt/Pt tl t
TDPRt/Pt
(Et/Pt ) NTRGOt GSUB t/Pt
1.2 Interest iGt GKTR tIPt i3t BGt-l /Pt
7t G tPL t_1pt (Et/Pt) it BFGt-I
1.3 Consumption Relative (Pc t Pt)/Pt] CGt
Price Change
2. Capital Account
2.1 Investment inGt
2.2 Investment Relative t(PINt - Pt)/P inGtPrice Change
2.3 Capital Grants (Et/Pt ) KTGt
2.4 Real Financial Wealth dcGt - dcGt-1 gktrt gktrtChanges
cbsGt - CbsGt-l gkplt - gkplt 1
bGt bGt-1
bfGt -bfGt-l
2.5 Real Financial Wealth [lt/( 1 + it )] (dcGt_l + Erltl/( + rid]Gains and Losses
cbsGt-l +bGt-l + (gktr t-l+ gkpl t_
bfGt-l1
14
TABLE 1
(Contd.)
32t (dcGt + cbuGt + bGt + '2t (gktrt + gkpl )
+ bf )
t( ilt - elt d/1 + fid)]
fGt-1[f t- c2dit) + ed
f 62t)/(1 +
bfGtt
15
TABLE 2
SOUP.CES AND USES OF FUNDS: PUBLIC ENTERPRISES AND LOCAL GOVERNMENT
(In real terms)
ACCOUNTS SOURCES USES
1. Current Account
1.1 Non-Interest PLFY t/Pt
1.2 Interest i7t GKPL t/Pt
i8t BPLt-l /Pt
(Et/Pt) it BFPLt-l
2. Capital Account
2.1 Investment inPL
2.2 Relative Investment [(PINt- Pt)/Pt]inPLtPrice Change
2.4 Real Financial WealthChanges gkplt - gkplt 1
bPLt -bPLt-1
cPLt dcPLt-1
cbsPLt - cbsPLt1
bfPLt - bfPLt-1
2.5 Real Financial Wealth [ritI(l + Iit)Gains and Losses
(gkplt_ 1 + bPLt-+
+ dcPLt-1 + cbsPLt-l)
r2t (gkplt + bPLt + dc PLt +
+ cbs PLt)
(lt - Elt)/(l +'t)I
16
TABLE 2(Contd.)
bfp1lt 1
((- 2t e2t)/(1 + 6 2t ) 1 bfplt
17
TABLE 3
SOURCES AND USES OF FUNDS: CENTRAL BANK
(In real terms)
ACCOUNTS SOURCES USES
1. Current Account 0 0
2. Capital Account
2.4 Real Financial Wealth hBSt - hBSt-1 dcGt -dcGt-1Changes
dbbscBt - dbbs CBt-l dcPLt - dcPLt-1
hPRt -hpRt-l dcBst - dcBst 1
dbprCBt dbprCBt-l rCBt - rCBt-1
nfb -nfbCBt CBt-i
2.5 Real Financial Wealth r it/ (1 + rit)] (hBSt-1 + [flt/(l + 'lt)]Gains and Losses
+ dbbsCBt-1 + hPRt-+ (dc Gt-l + dcPLt-
+ dbprCBt- 1 ) + dcBSt-)
'-2t (hBSt + dbbsCBt 2t (dcGt + dc PLt+
+ hPRt + dbprCB) + dc BS)
[(r It - cid/ (i + irlt)] f(flt - eit)/(l +
ifi+CBt-1l fit lt)I rCBt-
[(f 2t - 2t)/(l + e2td] ('r2t - e2t)I
bCBt-1 (1 + 620]
rCBt
18
TABLE 4
SOURCES AND USES OF FUWDS: BANKING SECTOR
(In real terms)
ACCOUNTS SOURCES USES
1. Current Account 0 0
2. Capital Account
2.4 Real Financial Wealth dcBSt - dcBS 1 cbsGt - CbsGt-1
depPRt - dePPRt-1 cbs PLt - cbsPLt-1
qmont - qmont_1 hBSt - hBSt-1
nfbSt - nfb BSt- dbbsCBt - dbbeCBt-1
cbs PRt - cbsPRt-l
rBSt -rBStI
2.5 Real Financial Wealth ['it/(l + 1lt)] (dcBStl + (rlt (1 + it)Gains and Losses
+ depPRt-l + qmont-1 + (cbsGt-l
- nfb BSt- + cbs PLt-+
12t (dcBSt + dePPRt + +hBSt-l +
+ qmon t + nfb BS) dbbsCBt-l+
[(T it- Elt)/(l + 1lt) +cbsPRt-l +
nfbBSt-l
[((T2t (1 + ¶2d] 2t (cbsGt + cbs PLt+
nfbBSt + hBSt + dbbsCBt +
+ cbsPRt)
19
TABLZ 4
(Contd.)
(t Ift - cl)I/( +
+ Wi) 3rid') ' BSt-1
[ (i2t - e2 t)/(l +
+ 6 2t ) rpSt
20
TABLE 5
SOURCES AND USES OF FUNDS: NON-FINANCIAL PRIVATE SECTOR
(In real terms)
ACCOUNTS SOURCES USES
1. Current Account
1.1 Non-Interest PRFYt/Pt cPRt
G t/Pt TDPRt Pt
(Et/Pt) NTRPRt (Et/Pt) rrt PKt-1
(Et/Pt) WREMt
1.2 Interest 1B6t GKTR /P
3. tPLt-lt t t t PRt-li B /P ~~(E /P)i BF
(E t/Pt) it RPRt-1
1.3 Consumption Relative [(P ct p /Pt] cPRtPrice Change
2. Capital Account
2.1 Investment inPRt
2.2 Investment Relative [(P P )It]ipPrice Change t t I t
2.4 Real Financial gktr t g ktrt 1 hPRt -hPRt-1Wealth Changes
dc PRt dc PRt-l dbprcbt - dbprcb t
cbsPRt cbsPRt-1 deppRt -dPPRt-1
fkt - fkti1 qmonl - qmont-
bfPRt - bfPR 1 bGt bGt-1
bPLt -bPLt-I
rPRt -rPRtI
21
TABLE 5
(Contd.)
2.5 Real Financial Wealth [((it/(I + t)] [(I it/(I + 1' )]Gains and Losses
(gktr t- + dc Pt-+ (hPRt-I+
+ CbSpPRt-1) + dbprcb t1+
+ dePPRt- 1 +
+ qmont 1 +
+ bGt_l + bPLt-l)
f2t (gktrt + dc PRt+ 2t NU + dcprcbt +
+ cbsPRt) + depPRt + qmont+
G bGt + bPLt)
Iflt -it)I(l + fi-] 1(ylt Eut)M( +
(fkt +bft 1 ) + b _ lt ) rPRt-l
[('2t - 62t)/(l + )2I) 2t- C2t)/(l +
(fkt + bfpRd) E2t)] rPRt
22
TABLE 6
SOURCES AND USES OF FUNDSs EXTERNAL SECTOR
(In real terms)
ACCOUNTS SOURCES USES
1. Current Account
1.1 Non-Interest
1.1.1 Trade mintPRt + mct + mc PRt+ xgnft
+ miGt + miPLt + MLPRt
1.1.2 Transfers (Et/Pt) (NTRGOt +
+ NTRPKt )
1.1.3 Factor Payments (Et/Pt) rr t Ft-1 (Et/Pt) WREt
1.2 Interest (EI/P ) i (BFG + (E/P it R...
+ BPLt-1 + BFPRt-l)
1.3 Export and Import E(PMINTt - Pt)/Pt] mintPRt E(PXt- Pt)/Pt] xgnfatRelative PriceChanges [(PMCt - Pt)/Pt (mcGt+
+ MC PRd)
[ (PMIt Pt) JPt]
(miGt mPLt + PRt)
2. Capital Account
2.3 Capital Grants (Et/Pt) KTG t
2.4 Real Financial r - r fk fkWealth Changes CBt CBt-I t f bt 1
rPRt - rPRt 1 bfPLt - bfpLt 1
bfpRt - bfPRt-1
nfbcBt - nfbCBt- 1
nfbBst snfbBSt-1
23
TABLE 6
(Contd.)
2.5 Real Financial Wealth ((rlt- Olt)I( l )(flt- el)/ (l + X1Gains and Losses
(rCBt-1 + rBStl+ (fk t-+bf Gt-+
rPRt-l) bfPLt-l
t1(2t- 2t)/(1 + E2t)] +bfPRt+
(rCBt + rBSt + rPRd) +nfbCBt-l+
nfbBSt-l)
E(2t - e2t)I(l +
T 6 2t)] (fkt +
+ bfGt + bfPLt +
+ bfPRt + nfb CBt+
+ nfbBSt )
MATRIX Ir NOMINAL MARONE3CNIC AND FINAN20 W A 6-SECTR ECONY
Pubi icEnt rpri"a Non-Financial
National Central and Loenl Central fanking Private ExternalAccounts Iovernment orn_nt 8ank Syst Sect ar Sector(a) (PL) (CS) (OS) (PR) (F)
National ccounte Co CPR E XNFS- B NCO -E iCpR -E IWPR
Central Governmnt WY is Qam
TI i7 0KPL TDpR E NTROG
Public Enterpriccs PLFVandLocal Gn_vement 0513 - CSJ8
Central Bank
flanking SOyte
Mmn-Financial arR E NIAPAPrivet. Sector E YMAFY ia a is 8PL E is RpR
Eaternal Sector E i PF0 E i*RFpL E rr RC 1E "Co E lapR E BFfp
E MCPRt
SAVIN A bINli
Central Covernmnt SC
Public Enterpriecand
Local Gover _ent SPL
Central flank Sr8 ' 0
flanking Systee aOS ' 0
Non-FinancialPrivate Sector SPR
Etemrnal Sector SF
Total Saving So SPL S ' ° SOS 0 ° SPR SF
Total e Y Totel U Total Us" T. LA*e a 0 T. LUe* a 0 Total Uee Total Us"
MATRIX I 4ITMAL ACIWBW FM A -SECTO R Y
PublicEnterprie Non-Financial
Central and Local Central Banking Private ExternalGovernment Governmnt Bank Syrte Sector Sector Investment Tot l Source
National Account, Die DIt IR
- E K - E mIpL - E SIpR Subtot. Inv. Y
Central Governmnt Cror Income
Public Enterprises Croes RL Income
andLoca I Governmnt
Central Banlk Croa" CB Income 0
Banking Syat_m Croe_ BS Income - 0
Non-FinancialPrivate Sector Cro_m PR Incom
External Sector E NIG E NIpL E I4IpR Imort In. Croe F Income
SAVING A PRROWDIC
E KTC
Central Governmnt dDCO da3Sq dB0 E dSFC C Borrowing * Sawing
Public Enterpriee dPL dDCpL dCBSpL dBpL E dBFp. PL Borrowing * Saving
andLocal Governwent
Central Bank fsdPdDOBSCB n trnl RCB E &*:Am CS Borrowing * Saving
Banking System dOWPR
dDCgS d*od E dMFDe BS Bbrrowinp * Saving
Non-Financial E dSPpR
Peivate Sector ADR dDCPR dCBSPR E dFK PR Borrowing * Saving
External Sector E dRCS E dRA E dRpFtR F Borrowing * Saving
Total Seving Total Saving
Total Uee Aseet Accum. A_et Accue. Anoet Accum. Ae-,t Accus. As t Acci.e Total Invetment
MATRIX II: REAL MACROECONC . FItCAL FLOWS FOR A 6-SECTOR EC
Pub icEn,terprises Non-F ,ancialI
National Central and Local Central Banking Private ExternalAccounts Governmnt Governmnt Bank System Sector Sector
(0) (Pt) (CO) (U3S) (PR) (F)
National Accounts c "C CPR - (PC(; xgnf* - mintpnC0 (P'- P)/P cPR (P - P)/P xgnfe (P~ - P)P
eCO (INC - P)/P - cPR (PNC - P)/P m.ntpRj C I4IT - P)/P
Central Governent (GFY * TI)/P i6 GkM/P
P. E. and L. G. (PLFY . GsW)P - CSU0/P
Central Bank
Bankiing System
Non-Financial GTR/P (E/P3 TPrivate Sector *a 80/P i 8 BP.jP (E/P) i
External Sector (E/P) is 9F0 (E/P) is =pL ,E " FKpP rrmen (~~~~~~~~~~~~~~~~~E/P 1* BFpR mintPR
mCG (PIGl-/P mCPcpR CPNG-P)/P mintpR(PttNr-P)IP
SAVINC A BOPRRMINO 0%
Centrol Covernment SC
Public Enterpri;.cand
Local Governmnt epL
Central Bank CEt a 0
fanking Systes ot 0
Non-FinancialPrivate Sector GPR
External Sector *F
Total Saving a0 PL aso O an * O am OF
Total Ume y Total Uma Totalises, TUseamO T.UmO TotalUse TotalUUem
ITRIX II NOMINAL l FDAWCIAL FLOWS FOR A 6-SETOR ECONOKY
Publ icEnterpriiee Non-Finxncial
Central and Local Central Banking Private ExternalCovorn_nt Government Bank Sy-ta- Sector Sector Investment Total Sources
National Accounts in0 IC inPL - ml* inPR - *NPt yno JPI - P%SP inpL(Pt -%LrtP inp11 (P P )_p 0
-- 1PL(P - p)/P ;P ( -P)/P Subtot. Inv.
Central 0a rn.ent Gros Incm
P. E. and L. C Cross PL Incoam
Central Bank Creu- CO Incom. - 0
Banking Sytem Croe b5 Inca. - 0
Non-FinancialPrivate Sector Cri. PR Incr_w
External Sector *'C *'PL *iPR Cro- F Incme.faI(PNI - P)/P
1PL (PI, - P)/p *iPR (P"I - P)/P Import Inv.
SAVINOS & BORRING
Central Covernaent ddc0 dcb J dba E/P)KTC dRL C. Bardc0 wcba a b0 dbgfQ (.-c)bfC CLL * Svi;ng
Public Enterprias dgkpl ddcpL dcbap1 dbpL dbfpL dRL P1. Bar.and CUL + Saving
Local Oovernmnt s gkpl * dcpL ff clepi I bpL (i-e)bfpL
Central Bank dbeg aS @ hq; ddPb CBd' nfR Cb('<)nfbdl dRL CO BSr.Central Sank ~~~~~~~~~~~~~~~~~~~ddhLv dnfbca nab± CL * Saving
. dm..~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Banking System d.BScs ddeppR ' deppR dnfbaS dRL BS Bar.* dcg8s dqaon a qmon (r-e)nfb 53$ CUL * Saving
Non-Financial dgktr ddcpR dcbe,R dbfpR (if-a)bfPR dRL PR Bar.Private Sector w gktr ' dcPR * cbapR dfk (z-efk CLL * Saving
drCS dr5 s drPR dRL F Bar.External Sector (C-4)rCe (W-e)re w 'PR CL. * Saving
Total Saving Total
dRA CLA dRA CLA dRA CLA dRA CLA dRA CLA dRA CLATotal Lin" Aset Accum Aset Accua. Asat Accus. Aset Accum. A_ t Accum. Aset Accum. Total Invaataant
28
appreciation.7
2.3 Balance Sheets, Net Wealth and Saving
This section introduces the balance sheets and the corresponding
definitions of net wealth for each sector. Tables 7 - 12 define each sector's
real wealth as the sum of financial wealth (fw) and non-financial wealth. Non-
financial wealth is composed in all but the private sector of non-human wealth
(nhw) or the valued capital stock. In the case of the private sector, a second
component of non-financial wealth is human wealth (hw).
The financial and physical capital variables that comprise net wealth are
consistent with the corresponding flows and stocks which appear in the constant
price budget constraints of tables 1 - 6. However, there is one essential
difference arises between the real flow budget identities in tables 1 - 6 and
the changes in net financial (fwt) and physical (nhwt) wealth consistent with
tables 7 - 12. While constant price budget flows define "under-the-line' saving
(St/Pt) of each sector as the deflated change in nominal financial wealth, the
change in financial and physical wealth (st) subtracts from the former concept
of saving the capital gains (or losses) derived from the erosion in real
liabilities (or assets) due to domestic inflation and real exchange rate
appreciation:
(10) St ( ft - fwNt-1 ) + (nhw t -nhw _1)
= St /Pt - Capital gains (net of losses) due to inflation and
real exchange rate appreciation in period t.
7 For presentational convenience, all time indices are dropped in bothmatrices. Changes in holdings in the lower right submatrices are denoted by theletter d preceding the corresponding variable name. Capital losses (gains) inasset (liability) holdings due to inflation or real exchange rate appreciationare denoted by X or (r-e) preceding the corresponding variable.
29
Hence the balance-sheet concept (st) equates saving with the net
accumulation of real or constant price wealth. The numerical difference between
this concept of saving and the flow budget measure of saving will be very
substantial in countries with high inflation or significant real exchange rate
depreciation (appreciation).
Capital gains and losses due to high inflation underly the frequent
distinction made between flow public sector dissaving and the public sector
operational deficit, which subtracts from the former the inflation component of
interest payments on indexed domestic public debt8. However, balance sheet
saving in eq. (10) corrects budget flow saving (or distaving) for capital gains
and losses due to inflation and real exchange rate appreciation affecting both
interest and non-interest bearing assets and liabilities.
8See World Bank (1988), pp. 56, for a discussion of different measurementsand corrections of public sector deficits.
30
TABLE 7
BALANCE SHEET: CENTRAL GOVERNMENT
(In real terms, at end of period)
WEALTH COMPONENTS ASSETS LIABILITIES
1. Financial Wealth
(fwGt) gktrt dcGt
gkplt cbsGt
bGt
bfGt
2. Non-Financial Wealth
2.1 Non-Human Wealth
(nhwGt ) (PKGt/Pt)KGt
3. Net WealthfwGt
31
TABLE 8
BALANCE SHEET: PUBLIC ENTERPRISES AND LOCAL GOVERNMENT
(In real terms, at end of period)
WEALTH COMPONENTS ASSETS LIABILITIES
1. Financial Wealth(fwPLt) gkplt
bPLt
dcpLt
cbsPLt
bfplt
2. Non-Financial Wealth
2.1 Non-Human Wealth
'nhwpLt) (P KPLt /P t) KPLt
3. Net Wealth
nwPLt
32
TABLE 9
BALANCE SHEETs CENTRAL BANK
(In real terms, at end of period)
WEALTH COMPONENTS ASSETS LIABILITIES
1. Financial Wealth
(fW'CBt) dcGt hBSt
dcpLt hPRt
dc Bst dbbs CBt
rCBt dbbrCBt
nfbCBt
2. Non-Financial Wealth
2.1 Non-Human Wealth(nhwCbt) 0
3. Net Wealth
nlwCBt = 0
33
TABLE 10
BALANCE SHEET: BANKING SECTOR
(In real terms, at end of period)
WEALTH COMPONENTS ASSETS LIABILITIES
1. Financial Wealth(fwBSt) hBSt dcBst
dbbsCBt dePPRt
cbsGt qmont
cbsPLt nfbBSt
cbsPRt
rBSt
2. Non-Financial Wealth
2.1 Non-Human Wealth(nhwBSt) 0
3. Net Wealth 3nwBSt -
34
TABLE 11
B.ALANCE SHEETs NON-FINANCIAL PRIVATE SECTOR
(In real terms, at end of period)
WEALTH COMPONENTS ASSETS LIABILITIES
1. Financial Wealth
(fwPRt) hPRt gkt rt
bprcbt depRt
depRt PcbsPRt
qmont fkt
bGt bfpRt
rPRt
2. Non-Financial Wealth
2.1 Non-Human Wealth
(nhwPRt) (P KPRt/P t) KPRt
2.2 Human Wealth hwt
3. Net WealthnwpRt
35
TABLE 12
BALANCE SHEET: EXTERNAL SECTOR
(In real terms, at end of period)
WEALTH COMPONENTS ASSETS LIABILTITIES
1. Financial Wealth
(FWFt) fkt rCBt
bfGt rBSt
bfpLt rPRt
bfpRt
nfbCBt
nfbBSt
2. Non-Financial Wealth
2.1 Non-Human Wealth
(nhwFt) 0
3. Net Wealth
"vFt
36
2.4 Intertemporal Budget Constraints
The intertemporal budget constraints are the stock or present value
equivalents of the flow budget constraints derived in subsections 2.1. - 2.2.
They can be written as discounted values of either nominal or real expected
future expenditure flows, discounted by the nominal or real interest rate,
respectively. In the following the intertemporal budget equations are written
in real terms, using as deflator the GDP deflator for consistency with the
constant price flow constraints in section 2.2).
Formally, intertemporal budget constraints are derived by forward
integration of expected discounted flow budget constraints, with the added
imposition of a condition that each sector's debt cannot grow systematically at
a rate that exceeds the discount rate (this is known as the no-Ponzi game
condition). The budget constraints simply state that net wealth is equal to the
difference between expected future discounted expenditure and income flows.
In the following the intertemporal budget constraints of only three sectors
are presented: the consolidated public sector, the consolidated financial/non-
financial private sector, and the external sector. Sector consolidation is
ccxsistent with that applied to Zimbabwe in the following section. Variable
definitions are presented in appendix 1.
The intertemporal budget constraints for the public, private, and external
sectors are given by the following corresponding equations:
37
(11) [ h _ ddtt 1 +rPu 1 - fdpTt_i] + PhUpUt +
r I~~~~~~~rl
+ Expt [at Rs (ra hs_- + ( + ir ) h81 + r28 h8+
+ ((a. - r ) - (rpU 5 1 P fd s + +
is 15 PUS-! fP )us.8-I)PU~~
+ ( 1 r 1is (rPUs-1 fdPUS-i) ( 1 + C (rPus - EdPusM
F GSUB TIs TDppV Ea 1
+ EDt -8t R8 ( p SJ p8
Exp R ( - -+
EXt [st Rs 1 ( Us- ( + r pl+s2
+ Expt [ st (R CPS - 8)P
r rlls ~ ls) rPPs-l~ fdPS~l) ( 1 +ezs )(rPP8 ftpp))](12) Ih t + dd t1+.r p-E dpp 1, + nhwpp_l+Ezpt tR
+ Expt Et Rs I-(r. h._ + ( + hs1 I2s hs)
+( *- r -rfd )+
1 + (r PP5 1 fdpps-1 ) + c (r 5Pp -d I1sls 28
38
-Expt Et Re [ cPP + f- + rr, fks-l - CTPP I] +s
+EXPt [sEt Rs ) c 1P
(13) [ rp_ rpp1 + fdpUt 1 + fdpt_P1 ] + Expt [ sEt R. (rr 8 8-fk1)] +
+ Exp [ sEt Rs 1(i - r) (fdPU81 + fdpp-_l - U8- PP-r +
+ ( 1L r ) (fdiPUs + fd PPs-1 rPUs-1 rPPs-1 )isIs
+ ( 2s) (fdPUS + fdPPs - rPU, - r PP -
ExPt [Et 8 - xgnfs8 + (mintpp P + McPUS + Mcpp +
EPUS mipp - p (CTPU + CTPP )1 +
+ Exp Et RRs xgnfP + ( PMINT -P ) mintpp +
MCIs. s p -P
+( p8 ) (mcPUS + MPppS) + ( p (miPUS + mippS)I]
where Expt is the expectation conditional on information at the beginning of
period t, r8 is the real discount rate defined as the nominal interest rate paid
on the domestic public debt less the rate of domestic inflation in period s, and
R., the discount factor, is defined as:
R - II 1 r5 Sint+l 1 +r
5
39
The equations distinguish explicitly between the stock components and the
expected discounted future flow components of the intertemporal budget
constraints. This is a useful device for differentiating between currently
observed and expected unobserved variables. In addition, on the left-hand side
the equations distinguish between the initial stocks which comprise total
financial and physical (non-human) wealth and the expected future capital
gains/losses due to inflation and real exchange rate appreciation; on the right
hand side; they distinguish between expected future real aggregate demand quantii
and expected future relative price changes affecting those aggregate demand
components.
2.5 Implications of Macroeconomic Consistency for Macro Analysis and Model
Building
The basic feature of the framework developed above is that it assures
consistency, in the sense that budget constraints for the principal sectors of
the economy are all satisfied at the same time. Flow budget constraints form
the basic grid for intratemporal consistency. Flow budget constraints expressed
in real terms allow inter-period comparisons of all relevant variables, and
permit a distinction between real flow variables and their relative price changes
as well as between changes in real asset holdings and capital gains and losses
derived from inflation and nominal devaluation. This provides a useful framework
for carrying out short to medium term financial and macroeconomic programming
for developing economies.
Long-term and solvency questions are addressed by the inter-temporal budget
constraints. These provide the relevant restrictions for ex-ante private sector
behavior under unrationed forward-looking behavior and access to credit markets.
40
In addition, they provide ex-post solvency restrictions for any sector, private
or public, and therefore are essential for carrying out (for instance) an
analysis of the sustainability of public sector deficits.
Budget constraints also impose restrictions on the underlying goods and
asset demands. Asset holdings at any point in time imply what is known as
"adding up" constraints, stressed by Brainard and Tobin (1968) and Tobin (1969).
These state that the sum of the partial derivatives of asset demands with respect
to financial wealth is 1, while the sum of the partial derivatives of asset
demands with respect to any other individual variable (income, asset returns)
is equal to zero.
An analogous adding up constraint holds for the current flow uses of funds
of the private sector: consumption, taxation, and saving. As reflected in any
simple Keynesian model, the sum of the corresponding marginal propensitJes must
be unity. In addition, the sum of the corresponding partial derivatives with
respect to any other variable (interest rates, financial wealth) has to be zero.9
3. APPLICATION TO ZIMBABWE
This section illustrates the usefulness of the consistency framework
developed above by applying it to Zimbabwe. This illustration is a simplified
three-sector version of the six-sector application to Zimbabwe presented in Khadr
and Schmidt-Hebbel (1989).1O
9Strictly speaking, the above discussion applies to continuous time. Theadding up constraints have to be modified slightly for a discrete-time model,as shown by Turnovsky (1977, pp. 63).
10 For data sources and methodological observations see the paper referredto, particularly Appendix II.
41
The three sectors considered here are those of section 2.4 above: the
consolidated public sector (PU) obtained by consolidating the accounts of the
central government, public enterprises and local government, and the central
bank; the financial/non-financial private sector (PP) obtained from a
consolidation of the non-financial private sector and the banking sector; and
the unchanged external sector (F). Definitions of variables and current and
constant flow budget constraints are presented in Appendix 1 of this paper.
3.1 Macroeconomic and Financial Flows in Current Prices
Tables 13-15 depict the current and capital account items in the nominal
budget constraints for the different accounts for the years 1981 and 1987. 1987
was chosen in order to provide the most recent snapshot of resource transfers
in Zimbabwe permitted by data availability. 1981 was chosen as a comparison year
because, as explained below, it exhibits a somewhat different pattern of resource
transfers.
In comparing the structure of nominal flows across the two years, the most
striking difference appears in the way that the excess of public investment over
saving is "absorbed" by an excess of private saving over investment on the one
hand versus foreign saving (i.e., a current account deficit) on the other. In
1981 the excess of public investment over public saving amounted to 13.31Z of
GDP. The corresponding resource transfers were an excess of private saving over
investment (1.4Z) and a current account deficit (11.91Z). In 1987, the picture
is considerably different. The excess of public investment over saving (12.13X
of GDP) is balanced by a much more substantial excess of private saving over
investment (11.73Z) and a negligible current account deficit (0.42).
42
These figures reflect a trend in government policy since the early 1980s
towards controlling external indebtedness through the use of an administered
system of foreign exchange allocation. The latter has increasingly restricted
imports, particularly to the private sector. In turn, the shortage of imports
has repressed investment expenditure and generated *forced" saving. The growing
excess of private saving over investment has fostered an increasing transfer of
resources form the private to the public sector. This has in turn allowed a
persistently large public sector deficit to coexist with a shrinking current
account deficit in the balance of payments. In addition, however, gross domestic
investment has declined from 23.142 of GDP in 1981 to 18.452 in 1987, with most
of the decline explained by lower private sector investment. This decline in
private investment accounts in large measure for the paucity of Zimbabwe's growth
performance since independence.
What are the financial asset changes associated with these resource
transfers? In 1981, the public sector borrowing requirement (PSBR) was 10.6? of
GDP. The lion's share of this (8.232) was financed by external borrowing. In
1987, the PSBR was 12.68Z of GDP. 11.20? of GDP came from domestic debt issues,
with a negligible contribution (0.22? of GDP) from foreign borrowing. For both
years, and particularly 1987, the monetized portion of the PSBR was very small.
This explains how in recent years inflation has been contained in spite of
exceedingly large public sector deficits.
3.2 Macroeconomic and Financial Flows in Constant Prices
Tables 16-18 are the real terms counterparts of Tables 13-15. In terms of
the pattern of resource transfers, the inferences drawn by comparing 1987 with
1981 in percentage of real GDP terms are of course no different from those drawn
43
in the preceding subsection, except that the deflated expenditure components of
GDP can now be split up into a quantity term and a relative price loss term.
For example, in 1981 public investment amounted to 10.952 of GDP. In quantity
(1980 unit base-price) terms, however, it totalled 11.622 of GDP. The -0.67
residualll represents a relative price gain (i.e., a negative loss) attributable
to the fact that the deflator for investment goods or average rose less rapidly
than the GDP deflator between 1980 and 1981. For 1987, the opposite applies.
Public sector investment totalled 10.332 of GDP. In quantity terms, it amounted
to 8.34Z. The 1.992 residual represents the relative price loss that arises from
the fact that the investment deflator on average rose more rapidly than the GDP
deflator between 1980 and 1987.
It is also instructive to examine the decomposition of deflated changes in
holdings of financial assets and liabilities into a change in real stocks12 and
a capital gain/loss component. Consider for example the increase in public sector
domestic debt. In 1981, this amounted to 1.042 of GDP. However, the real debt
burden actually declined by 4.362 of GDP, due to the erosion in the real value
of the outstanding stock of public debt (5.40? of GDP). Even in a relatively low
inflation environment, therefore, 'hidden' transfers to the public sector can
be quite substantial. These transfers are brought out explicitly in the concept
of adjusted saving, which corrects deflated savings for receipts and expenditures
arising from capital gains and losses. As can be seen in the last line of Table
16, adjusted public sector saving (5.222 of GDP in 1981) is markedly different
from (and of opposite sign to) its unadjusted counterpart (-2.36? of GDP).
l1Percentages occasionally do not add up exactly because of rounding errors.
12Real stocks refer to end-of-period stocks in temss of their end-of-periodcommand over units of GDP at 1980 prices.
44
TABLE 13CONSOLIDATED PUBLIC SECTOR ACCOUNTS
(Current Zimbabwe Dollars)
1981 1981(t) 1987 1987(Z)
CURRENT SOURCESs
Public Sector Factor Income (PUFY) 161 3.63 650 6.68Indirect Taxes (TI) A56 10.29 1366 14.05Direct Taxes Net of Transfers to PP (TDpp) 250 5.64 976 10.04Current Receipts from F (CTPU) 0 0.00 0 0.00
less CURRENT USES:
Subsidies (SUB) 122 2.75 350 3.60Public sector Consumption (PC.cpu) 684 15.43 2031 20.89Interest on Domestic Debt (i.DD) 50 1.13 488 5.02Interest on Foreign Debt (E.i*.FDpu) 115 2.59 299 3.07
equals PUBLIC SECTOR SAVING (Spu) -104 -2.35 -176 -1.81
equals CAPITAL USES (Asset Accumulation):
Public Investment (PIN.inpu) 486 10.96 1004 10.32Increase in Foreign Assets (E.dRpu) -120 -2.71 53 0.55
less CAPITAL SOURCES (Liability Accumulation):
Increase in High-powered Money (dH) 44 0.99 3 0.03Increase in Domestic Debt (dDD) 46 1.04 1089 11.20Increase in Foreign Debt (E.dFDpu) 365 8.23 21 0.22Capital Grants from Abroad (E.KTPU) 15 0.34 120 1.23
45
Table 14CONSOLIDATED PRIVATE SECTOR ACCOUNTS
(Current Zimbabwe Dollars)
1981 1981(Z) 1987 1987(1)
CURRENT SOURCES &
Private Sector Factor Income (PPFY) 3938 88.83 8058 82.87Interest Recelved from PU (L.DD) 1.13 488 5.02Interest on Foreign Assets (E.i*.Rpp) 0 0.00 55 0.57Current Receipts from F (E.CTPP) -11 -0.25 -37 -0.38
less CURRENT USES:
Private Consumption (PC.cpp) 3046 68.71 5558 57.16Direct Taxes Net of Transfers from PU (TDpp) 250 5.64 976 10.04Interest on Foreign Debt (E.i*.FDpp) 0 O.'J0 0 0.00Profit Remittances to F (E.rr.FK) 79 1.78 98 1.01
equals PRIVATE SAVING (Spp) 602 13.58 1932 19.87
equals CAPITAL USES (Asset Accumulation):
Private Investment (PIN.inpp) 540 12.18 791 8.13Increase in High-powered Money (dH) 44 0.99 3 0.03Increase in Domestic Debt (dDD) 46 1.04 1089 11.20Increase in Foreign Assets (E.dRpp) -5 -0.11 8 0.08
less CAPITAL SOURCES (Liability Accumulation):
Increase in Foreign Debt (E.dFDpp) 37 0.83 -1 -0.01Increase in Foreign-held Equity (E.dFX) -14 -0.32 -40 -0.41
46
TABLZ 15EXTERNAL SZCTOR ACCOUNTS(Current Zimbabwe Dollars)
1981 1961(Z) 1987 1987(Z)
CURRENT SOURCESs
Imports of Intermediate Goods (PHINT.mint) 454 10.24 668 6.87Imports of Consumer goods by PU (PMC.mcpu) 116 2.66 277 2.85Imports of Consumer Goods by PP (PMC.mcpp) 536 12.09 760 7.82Imports of Investment Goods by PU (PMI.mipu) 147 3.32 356 3.66Imports of Investment Goods by PP (PMI.mipp) 165 3.72 280 2.88Interest Received from PU (E.i*.FDpu) 115 2.59 299 3.07Interest Received from PP (E.i*.FDpp) 0 0.00 0 0.00Profit Remittances from PP (E.rr.FK) 79 1.78 96 1.01
less CURRENT USES:
Exports of Goods end Non-factor Services (PX.zgnfs) 1097 24.75 2681 27.57Transfers to PU (E.CTPU) 0 0.00 0 0.00Transfers to PP (E.CTPP) -11 -0.25 -37 -0.38Interest paid to PP (E.i*.Rpp) 0 0.00 55 0.57
equals FOREIGN SAVING (Sf) 526 11.91 39 0.40
equals CAPITAL USES (Asset Accumulation):
Increase in Lending to PU (E.dFDpu) 365 8.23 21 0.22Increase in Lending to PP (E.dFDpp) 37 0.83 -1 -0.01Increase in Foreign-held Equity (E.dFK) -14 -0.32 -40 -0.41Capital Grants to PU (E.KTPU) 15 0.34 120 1.23
less CAPITAL SOURCES (Liability Accumulation):
Increase in Public Foreign Assets (E.dRpu) -120 -2.71 53 0.55Increase in Private Foreign Reserves (E.dRpp) -5 -0.11 8 0.08
47
TABLE 16CONSOLIDATED PUBLIC SECTOR ACCOUNTS
(1980 Zimbabve Dollars)
1981 1981(S) 1987 1987(2)
CURRENT SOURCES:
Public Sector Factor Income 141 3.63 286 6.69Indirect Taxes 398 10.28 601 14.05Direct Taxes Net of Transfers to PP 218 5.64 430 10.04Current Receipts from F 0 0.00 0 0.00
less CURRENT USES:
Subsidies 107 2.75 154 3.60Public sector Consumption (cpu) 622 16.06 725 16.94Interest on Domestic Debt 44 1.13 215 5.02Interest on Foreign Debt 100 2.59 132 3.08
Public Sector ConsumptionRelative Price Change -24 -0.62 169 3.95
equals PUBLIC SECTOR SAVING -91 -2.36 -77 -1.80
equals CAPITAL USES (Asset Accumulation):
Public Investment (inpu) 450 11.62 357 8.34Increase in PU Foreign Assets -119 -3.08 10 0.24
Public Investment Relative Price Change -26 -0.67 85 1.99
Capital Gain/Loss on PU Foreign Assets 14 0.36 13 0.30
less CAPITAL SOURCES (Liability Accumulation):
Increase in High-povered Money 8 0.20 -16 -0.38Increase in Domestic Debt -169 -4.36 290 6.78Increase in PU Foreign Debt 251 6.48 -181 -4.23Capital Grants from Abroad 13 0.34 52 1.21
Capital Gain/Loss on High-powered Money 30 0.77 17 0.40Capital GainlLoss on Domestic debt 209 5.40 190 4.44Capital GainlLoss on PU Foreign Debt 68 1.76 190 4.44
ADJUSTED PUBLIC SECTOR SAVING 202 5.22 307 7.18
48
Table 17CONSOLIDATED PRIVATE SECTOR ACCOUNTS
(1980 Zimbabwe Dollars)
1981 1981(Z) 1987 1987(Z)
CURRENT SOURCES:
Private Sector Factor Income 3439 88.80 3548 82.88Interest Received from PU 44 1.13 215 5.02Interest on Foreign Assets 0 0.00 24 0.57Current Receipts from F -10 -0.25 -16 -0.38
less CURRENT USES:
Private Consumption (cpp) 2769 71.49 1986 46.39Direct Taxes Net of Transfers from PU 218 5.64 430 10.04Interest on Foreign Debt 0 0.00 0 0.00Profit Remittances to F 69 1.78 43 1.0L
Private consumption Relative Price Change -109 -2.81 461 10.77
equals PRIVATE SAVING 526 13.53 851 19.88
equals CAPITAL USES (Asset Accumulation):
Private Investment (inpp) 500 12.91 282 6.59Increase in High-powered Money 8 0.21 -16 -0.37Increase in Domestic Debt -169 -4.36 290 6.77Increase in PP Foreign Assets -7 -0.17 -20 -0.47
Private Investment Relative Price Change -28 -0.72 66 1.54
Capital Gain/Loss on High-powered Money 30 0.77 17 0.40Capital Gain/Loss on Domestic Debt 209 5.40 190 4.44
Capital Gain/Loss on PP Foreign Assets 3 0.08 24 0.56
less CAPITAL SOURCES (Liability Accumulation):
Increase in Foreign Debt 22 0.56 -15 -0.35Increase in Foreign-held Equity -425 -10.96 -331 -7.73
Capital Gain/Loss on Foreign Debt 10 0.26 15 0.35Capital Gain/Loss on Foreign-held Equity 413 10.66 313 7.31
ADJUSTED PRIVATE SAVING 707 18.26 948 22.13
49
TABLE 18EXTERNAL SECTOR ACCOUNTS(1980 Zimbabwe Dollars)
1981 1981(Z) 1987 1987(Z)
CURRENT SOURCES:
Imports of Intenmediate Goods (mint) 418 10.79 153 3.57Imports of Consumer Goods by PU (mcpu) 111 2.87 90 2.10Imports of Consumer Goods by PP (mcpp) 508 13.12 242 5.65Imports of Investment Goods by PU (mcpu) 137 3.54 147 3.43Imports of Investment Goods by PP (mcpp) 155 4.00 105 2.45Interest Received from PU 100 2.59 132 3.08Interest Received from PP 0 0.00 0 0.00Profit Remittances from PP 69 1.78 43 1.01
Rel. Price Change on Imports of Intermediate Goods -21 -0.54 141 3.29Rel. Price Change on Imports of Consumer Goods by PU -8 -0.21 32 0.75Rel. Price Change on Imports of Consumer Goods by PP -40 -1.03 93 2.17Rel. Price Change on Imports of Investment Goods by PU -9 -0.23 10 0.23Rel Price Change on Imports of Investment Goods by PP -11 -0.28 18 0.42
less CURRENT USES:
Exports of Goods and Non-factor Services (xgnfs) 992 25.61 i661 38.80Transfers to PU 0 0.00 0 0.00Transfers to PP -10 -0.25 -16 -0.38Interest paid to PP 0 0.00 24 0.57
Relative Price Change onExports of Goods and Non-factor Services -34 ..0.88 -480 -11.21
equals FOREIGN SAVING 461 11.90 17 0.39
equals CAPITAL USES (Asset Accumulation)s
increase in Lending to PU 251 6.48 -181 -4.23Increase in Lending to PP 22 0.57 -15 -0.35Increase in Foreign-held Equity -425 -10.97 -331 -7.73Capital Grants to PU 13 0.34 53 1.23
Capital Gain/loss on Loans to PU 68 1.76 190 4.44Capital Gain/Loss on Loans to PP 10 0.26 15 0.35Capital Gain/Loss on Foreign-held Equity 413 10.66 313 7.31
less CAPITAL SOURCES (Liability Accumulation)t
Increase in Public Foreign Assets -119 -3.07 10 0.23Increase in Private Foreign Reserves -7 -0.18 -20 -0.47
Capital Gain/Loss on Public Foreign Assets 14 0.36 13 0.30Capital Gain/Loss on Private Foreign Reserves 3 0.08 24 0.56
ADJUSTED FOREIGN SAVING -13 -0.34 -464 -10.84
50
3.3 Balance Sheets and Real Wealth
Tables 19-21 present briefly stock balance sheets for the three sectors.
As before, all stocks are end-of-period stocks deflated by an end-of-period price
index. Note that the balance sheets have not been explicitly balanced;
constructing a non-financial wealth series is beyond the scope of this study.
The stocks show broad stability, although a marked decline in public
foreign reserves between 1980 and 1981 and an increase in external indebtedness
by the public sector up to 1986 can be noted. Between 1980 and 1987, the real
public debt almost doubled, and foreign-owned equity capital declined steadily,
reflecting mainly disinvestment by multinationals.
51
TABLE 19
BALANCE SHEET: CONSOLIDATED PUBLIC SECTOR
(1980 Zimbabwe Dollars)
WEALTH COMPONENTS ASSETS LIABILITIES
1. Financial Wealth 1980 1981 1986 1987 1980 1981 1986 1987
(fwpu) rPU 136 17 137 147 h 188 196 203 186
dd 1334 1166 2038 2328
fdPU 654 905 2108 1927
2. Non-Financial Wealth
2.1 Non-Human Wealth
(nhwpu ) (PKpu/P) KPU
3. Net WealthntwpUt
52
TABLE 20
BALANCE SHEET: CONSOLIDATED PRIVATE SECTOR
(Millions of 1980 Zimbabwe Dollars)
WEALTH COMPONENTS ASSETS LIABILITIES
1. Financial Wealth 1980 1981 1986 1987 1980 1981 1986 1987
(fwpp) h 188 196 203 186 fdpp 101 122 160 145
dd 1334 1166 2038 2328 fk 3948 3523 3470 3140
rpp 21 14 258 239
2. Non-Financial Wealth
2.1 Non-Human Wealth
(nhwpp ) (P KPP/P KPP
2.2 Human Wealth hw
3. Net Wealthnw
53
TABLE 21
BALANCE SHEET: EXTERNAL SECTOR
(Millions of Zimbabwe Dollars)
WEALTH COMPONENTS ASSETS LIABILTITIES
1. Financial Wealth 1980 1981 1986 1987 1980 1981 1986 1987
(fwF ) fk 3948 3523 3470 3140 rPU 136 17 137 147
fdPU 654 905 2108 1927 rpp 21 14 258 239
fdpp 101 122 160 145
2. Non-Financial Wealth
2.1 Non-Human Wealth
(nhwF ) 0
3. Net WealthnlWF
54
4. CONCLUDING REMARKS
This paper has developed a consistency accounting framework for
macroeconomic analysis. The methodology integrates nominal and real, flow and
stock budget constraints in a comprehensive form suitable for application to
countries with reasonably well-developed data bases.
A central feature of the methodology developed here is the inclusion of
constant price flows which permit the introduction of relative prices and real
(quantum) aggregate demand variables as well as capital gains and losses on asset
and liability holdings derived from the effects of inflation and real exchange
rate depreciation.
The application to Zimbabwe shows the potential usefulness of the framework
for carrying out financial programming tasks and serves as an accounting frame
for subsequent model building efforts.
Possible future extensions of the methodology could proceed along the
following lines:
Ci) Inclusion of current account transactions and equity for both the central
bank and the banking sector.
(ii) Disaggregation of the non-financial private sector into firms and
households (which allows explicit treatment of labor and stock market related
variables), and further disaggregation of the latter into wage earners and non-
wage earners (to specify different consumption patterns).
(iii) An explicit link between investment expenditure and physical capital
accumulation.
55
REFERENCES
Brainard, W. and J. Tobin (1968): "Pitfalls in Financial Model Building.'American Economic Review, 58, 99-122.
Crouch, R. L. (1972): Macroeconomics. Harcourt, Brace, Jovanich, New York.
Easterly, W. (1989): A Consistency Framework in Current Prices for MacroeconomicAnalysis with Applications to Colombia and Zimbabwe. Manuscript, The WorldBank, Washington, D. C.
Holsen, J. (1989): An Illustration of RMSM-X (Revised Minimum Standard Model-Extended). Manuscript, The World Bank, Washington, D. C.
Host-Madsen, P. (1979): Macroeconomic Accounts: An Overview. InternationalMonetary Fund, Pamphlet Series No. 29, Washington, D. C.
Khadr, A. and K. Schmidt-Hebbel (1989): A Macroeconomic Consistency Frameworkfor Zimbabwe, The World Bank, Washington. D.C.
Marshall, J. and K. Schmidt-Hebbel (1988): Un Marco Analitico-Contable Para laEvaluacion de la Politica Fiscal en America Latina. Manuscript, ECLAC,Santiago.
May, J. (1970): 'Period Analysis and Continuous Analysis in Patinkin'sMacroeconomic Model.' Journal of Economic Theory, 2, 1-9.
Meyer, L. H. L. (1975): 'The Balance-Sheet Identity, the Government FinancingConstraint and the Crowding-Out Effect." Journal of Monetary Economics,1, 65-78.
Patterson, K. D. and M. J. Stephenson "Stock-Flow Consistent Account: AMacroeconomic Perspective.' The Economic Journal, 98, 787-800.
Tobin, J. (1969): 'A General Equilibrium Approach to Monetary Theory." Journalof Money, Credit and Banking, 1, 15-29.
Turnovsky, S. (1977): Macroeconomic Analysis and Stabilization Policies.Cambridge University Press, Cambridge.
United Nations (1968): A System of National Accounts. Studies in Methods, SeriesF, No. 2, Rev. 3, New York.
World Bank (1988): World Development Report, Oxford University Press, New York.
56
APPENDIX 1
Three Sector Consolidation of the Consistency Framework
A. Sector Definitions
PU E G + PL + CB
PP E PR + BS
F E F
B. Definition of Variables
PUFY = GFY + PLFY
PPFY = PRFY
TDpp = TDPR - GTR
CTPU = NTRGO
CTPP = NTRPR + WREM
DD = B BPL + DBPR + DBBS + CBSG + CBSPL -GKTR DCBS
FDPU = BFG + BFPL + NFBCB
SPU SG + SPL + SCB
inPU = inG + inPL
inpp = inPR
PU= CG
cpp = cPR
PR BS
RPU RCB
KTPU = KTG
Rpp = RBS + RPR
57
FD = NFBBS + BFPR
Spp = sBS + sPR
mcPU = mcG
mcpp = mcP
mi mi + miPu G PL
mi = miPR
Note: The interest rates and interest payments have to be redefined according
to the stock redefinitions.
4
C. Flow Budget Constraints in Current Prices
The nominal flow budget constraints for the consolidated public,
consolidated private, and foreign sectors are the following:
(1) PUFY + TIt - GSUDt + TDppt + Et CTPUt P Ct PUt -it t-l
- Et it FDPUt-. = PUt = PINt inPUt (Ht Ht -1 (DDt - DD 1) +
+ Et GRpUt - RpUt_1) - Et (FDPUt - FDPUt_ ) - Et KTPUt
(2) PPFY+Et C t ct cppt TDppt Et rrt FKt 1 + i DD +
t E t i* R 1 Et it FDppt PPt t t-l t -H
t-1 DDt-l) + Et (R RP Pt_1) - Et (FKIt - FK t _
- Et (FD PPt - FDt- 1 )
xt gnt PMINt mintppt + PMCt (mcPut + mcppt) +
58
+ PMIt (miPut + mippt) - Et (CTPUt + CTPPt) + Et rrt FKt 1 +
+ E i (FD + FD - E it t Put-i Fpt.1 Et ~t RPPt-1. SFt
Et KTPU +Et (FKt -FK t_) + Et (FDPUt -FDPU +
+ Et (FDPPt - FDPP ) - Et (RPut - RpUt_) - Et (Rppt - Rppt_l)
D. Flow BudRet Constraints in Constant Prices
PUFYt TI TD GSUBt Et
(1) Pt P Pt - - + P CTPUt - (i DDt )/P
-Et--ICFD t - PutPt it FDPUt-I Pt )cPut P-t- inPut
* (Nt ) i t KTPU - (hI h )- (dd -dd +p Put ~pt t t t-1 t t-1
+(rPut rPUt 1 ) - (fdPut - fdPUt-1)
- it) - i[h1 + Jt- r 2tht] + r) ddt1 + r2t dd t] +
+Jit itt2
[( + ) rPut + 1 + e rPut]it 2
+(l fdt PUt-l ( 1 + c2 fd Put]it 2t
PPFYt TD E Et(2) Pt c P- Pt CTPPt - p rrt FRt- (+ t t- P t
59
Et* Et *ct - p SPPt -
+ _ i Ri FD ~)c~ i--t- -=jn +p it ppt-l t PPt-i P Ptppt +Ptt t tPt
+ (pINt t) PRt+ (ht - ht_ 1) + (ddt - ddt.1.) + -rPPt rPPt-l)t
- (fkt - fkt.1) ) (fdppt - fdppt-l) +
it "it1 + ) ) ht-1 + 2 t ht] + [(U + r ) ddt 1 + 2t ddt] +
it it
[( it ) fkt 1 + 1 + c ) fkt] it 2t
[ 1 +t rl ) fdPPt-l +( 1 + 62 ) fd ppt]it - + 2 2t
Et
(3) xgnfs (mint + mcPut + mc ppt + miPut + mippt) p (CTPUt +
2 KE+ CTPP + p rrt FKt + p! it (FD + FD +
t ~p"t _1 P t PUt-i ~PRt-1~
+ ~~xgnfs - )HINTt- (Pt (mcin+ t t t ) (McPut +
+ mcpp)_( MIpt ) (miput +miPPt) Ft_
Et KTPU + (fk -fktfd 1 + (fdppt fdPPt
r Pu ru -1 (r ppt rppt..1 ) +
60
[(1+ r )fk t l + + 62t fktl ++ [ irt rit) Pk ( 2t
+ +(l -^l ) fd PPt-1 + ( 1 + 6z ) fd Put]
it 2t
it tit)
[ ( + d rPut1 + l1 + e ) rPutit 2t
1 -6r pt- 1 -6 )r ptit tit)
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