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AN INTEGRATED APPROACH TO THE STUDY OF RESERVE EARNING ECONOMIES ÁNGEL GARCÍA BANCHS University of Siena, Annual Meeting 27-06-2008, Siena, Italy 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. 2 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. 3 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. 4 1. INTRODUCTION (Motivation) 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. 5 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. 6 1. INTRODUCTION (Motivation) Reserve Issuing Economies Local Currency Reserves Interest Rate Reserve Earning Economies Foreign Currency Reserves FX Rate Local Currency Reserves Interest Rate 7 1. INTRODUCTION (Motivation) 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. 8 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. 9 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?) 10 2. METHODOLOGY: STOCK-FLOW CONSISTENCY APPROACH (Cont) 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) 11 2. METHODOLOGY: STOCK-FLOW CONSISTENCY APPROACH (Cont) 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. 12 2. METHODOLOGY: STOCK-FLOW CONSISTENCY APPROACH (Cont) Sectoral Budget constraint (Vertical): Net Wealth I Net Regular Income I Capital Gains I System wide constraint (Horizontal N-1 sectors): I Net Wealth in the whole economy Net Wealth i i 1 Balance sheet, revaluation and transactions matrices. 13 2.1 Balance Sheet Matrix of a REE F Real Assets Inventories Fixed Capital Local Currency Financial Assets Cash Bank Reserves Government Dep. in CB Current Account Deposits Saving Account Deposits Government Bills Central Bank Bills, CDs Bank Bills, CDs Firm Bills, Comm. Paper Government Bonds Corporate (Firm) Bonds Credit Loans Lender of Last Resort Firm Equities H S&D S&D D D D D D D D D D D S D S D D D D D D S D B CB G ROW IN K D D D S S D D S D D D S D S S D D D S S Balance S D S S D 0 0 0 0 0 0 0 0 0 0 0 0 0 0 14 2.1 Balance Sheet Matrix of a REE (Cont) Foreign Currency Financial Assets Cash Off-shore Deposits Foreign Government Bills Foreign Government Bonds Foreign Corporate Bonds Foreign Credit Loans Foreign Equities Domestic Bank Reserves Domestic Deposits Domestic (Sovereign) Government Bonds Domestic Corporate Bonds Domestic Credit Loans Balance Sum F H B CB D D D D D D D D D D D D D D D D D G S S S S S S S D D D D D S D D D S D VF 0 D VH 0 S VCB 0 ROW Balance D 0 0 0 0 0 0 0 0 0 D 0 D 0 0 -(IN+K) 0 S S 0 0 VG 0 Vrow 0 15 2.2 Revaluation Matrix of a REE Real Assets Fixed Capital Local Currency Financial Assets Govt. Bonds Firm Bonds Firm Equities Bank Capital Foreign Currency Financial Assets Cash Off-shore Deposits Foreign Govt. Bills Foreign Govt. Bonds Foreign Firm Bonds F H + + + - + + + + + + + + + + + + + + + + + + B CB G ROW + + - 0 0 0 0 + - + + + Balance - 0 0 0 0 0 16 2.2 Revaluation Matrix of a REE (Cont) F Foreign Currency Financial Assets (Continued) Foreign Loans Foreign Equities Domestic Bank Reserves Domestic Deposits Domestic (Sovereign) Government Bonds Domestic Corporate Bonds Domestic Loans H - B CB G - + + + + + - + + - Balance + + 0 0 0 0 + 0 + 0 0 - + ROW 17 2.3 Transactions Matrix of a REE Domestic Economy Firms Households Cur Cap Cur Income process Consumption Govt. Exp. Fixed Invest. Inventory Acc. Exports Imports GDP Income Tax Wages Inventory Financing Cost Entrepreneurial Profits Bank Profits CB Profits + + + + + -Y - Cur CB Gov Cap Cur Cap Cur Cap - - + Y + - Cap Banks Row F, H, B, Balance CB, G Cur Cap - + - + + + + + - 0 0 0 0 0 0 0 0 0 0 + - + - 0 0 0 18 2.3 Transactions Matrix of a REE (Cont) Domestic Economy Row F, H, B, Firms CB Gov Households Banks CB, G Balance Cur Cap Cur Cap Cur Cap Cur Cap Cur Cap Cur Cap Rent Transfers Local Currency SA Deposits Govt. Bills CB Bills, CDs Bank Bills, CDs Govt. Bonds Credit Loans LOR Foreign Currency Off-shore Deposits Foreign Govt. Bills + + + + + + + + - + + + + - + - 0 0 0 0 0 0 0 - + + + + + - 0 + + + + - 0 19 2.3 Transactions Matrix of a REE (Cont) Domestic Economy Row Househol F, H, B, Firms Banks CB Gov Balance ds CB, G Cur Cap Cur Cap Cur Cap Cur Cap Cur Cap Cur Cap Rent Transfers Foreign Currency Foreign Govt. Bonds Foreign Corporate Bonds Foreign Credit Loans Foreign Equities Domestic Bank Reserves + + + Domestic Deposits Domestic (Sovereign) Government Bonds + + + + - + + + - 0 0 0 0 0 + 0 + 0 - - 20 2.3 Transactions Matrix of a REE (Cont) Domestic Economy Row Househol Gov F, H, B, Firms Banks CB ds CB, G Cur Cap Cur Cap Cur Cap Cur Cap Cur Cap Cur Cap Stock Variations Local Currency Cash Bank Reserves Govt. Dep. in CB CA Deposits SA Deposits Govt. Bills CB Bills, CDs Bank Bills, CDs Corporate Bills Govt. Bonds Corporate Bonds Credit Loans Loan Defaults Lender of Last R. Firm Equities - - - - + + + + + + - + + + + + + + - + + - + - - - Balance 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 21 2.3 Transactions Matrix of a REE (Cont) Firms Domestic Economy Househol Banks CB ds Gov Row F, H, B, CB, Gov Balance Cur Cap Cur Cap Cur Cap Cur Cap Cur Cap Cur Cap Foreign Currency Cash Deposits abroad Foreign Govt. Bills Foreign Govt. Bonds Foreign Firm Bonds Foreign Loans Foreign Equities Domestic Bank Reserves Domestic Dep. Domestic Govt. Bonds Domestic Firm Bonds Domestic Loans Loan Defaults Sum -Δ -Δ -Δ -Δ -Δ -Δ -Δ -Δ -Δ +Δ -Δ -Δ -Δ +Δ +Δ +Δ +Δ +Δ -Δ +Δ -Δ -Δ -Δ +Δ -Δ -Δ -Δ -Δ -Δ +Δ +Δ +Δ 0 -Δ 0 -Δ +Δ +Δ +Δ -Δ -Δ -Δ -Δ -Δ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 22 3. THE NEOCLASSICAL MODEL VERSUS THE POST KEYNESIAN MODEL 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. 23 3. THE NEOCLASSICAL MODEL VERSUS THE POST KEYNESIAN MODEL (Cont) 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. 24 3. THE NEOCLASSICAL MODEL VERSUS THE POST KEYNESIAN MODEL (Cont) 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 25 3. THE NEOCLASSICAL MODEL VERSUS THE POST KEYNESIAN MODEL (Cont) 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. 26 4. FEATURES OF MY MODEL − EXOG VS ENDOG VARIABLES. 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. 27 4. FEATURES OF MY MODEL − EXOG VS ENDOG VARIABLES. 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. 28 4. FEATURES OF MY MODEL − EXOG VS ENDOG VARIABLES. 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. 29 4. FEATURES OF MY MODEL − EXOG VS ENDOG VARIABLES. 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. 30 4. FEATURES OF MY MODEL − EXOG VS ENDOG VARIABLES. 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. 31 4. FEATURES OF MY MODEL − EXOG VS ENDOG VARIABLES. 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. 32 4. FEATURES OF MY MODEL − EXOG VS ENDOG VARIABLES. 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). 33 4. FEATURES OF MY MODEL − EXOG VS ENDOG VARIABLES. 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. 34 4. FEATURES OF MY MODEL − EXOG VS ENDOG VARIABLES. 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. 35 4. FEATURES OF MY MODEL − EXOG VS ENDOG VARIABLES. 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. 36 4. FEATURES OF MY MODEL − EXOG VS ENDOG VARIABLES. 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). 37 4. FEATURES OF MY MODEL − EXOG VS ENDOG VARIABLES. Monetary and credit aggregates: 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. 38 4. FEATURES OF MY MODEL − EXOG VS ENDOG VARIABLES. Monetary and credit aggregates: 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). 39 4. FEATURES OF MY MODEL − EXOG VS ENDOG VARIABLES. 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. 40 4. FEATURES OF MY MODEL − EXOG VS ENDOG VARIABLES. 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. 41 4. FEATURES OF MY MODEL − EXOG VS ENDOG VARIABLES. Short-term rate, GIR and foreign currency debt: FCD r FCD to GDP or to exports ratio Flexible Non flexible Flexible ΔGIR>0 ΔFCD>0 ΔGIR=0 ΔFCD=0 Inflation or loss of competitiveness Non flexible T rBG rBG z8 BG ΔGIR>0 ΔFCD<0 T rBG rBG T rBG rBG e.g. China Public Admin Whole Economy e.g. China GIR Public Admin Whole Economy GIR 42 4. FEATURES OF MY MODEL − EXOG VS ENDOG VARIABLES. 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”. 43 4. FEATURES OF MY MODEL − EXOG VS ENDOG VARIABLES. 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 accommodated. GD within the CB are also 44 4. FEATURES OF MY MODEL − EXOG VS ENDOG VARIABLES. 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. 45 4. FEATURES OF MY MODEL − EXOG VS ENDOG VARIABLES. 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. 46 4. FINAL REMARKS. 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. 47 APPENDIX 48 Table 1. The Balance Sheet Matrix of a REE Relations with the Rest of the World Domestic Economy Firms Households Banks CB Gov Balance F, H, B, CB, Gov Real Assets Inventories IN IN Fixed Capital KF KH CashF CashH KG K CashG GDG 0 0 0 M1G 0 Local Currency Financial Assets Cash Bank Reserves Government Dep. in CB CashB BResB Current Account Deposits M1F M1H -M1 Saving Account Deposits Government Bills Central Bank Bills, CDs Bank Bills, CDs Firm Bills, Comm. Paper Government Bonds M2F BGF M2H BGH BBF -BF BLGF*pblG BBH BFH BLGH*pblG -M2 BGB BCBB -BB BFB BLGB*pblG -BLF*pblF -LFB BLFH*pblF -LHB Corporate (Firm) Bonds Credit Loans Lender of Last Resort Firm Equities Bank Capital - eF*peF eFH*peF OFBH BLFB*pblF LB -LB -CashCB -BResCB -GDCB BGCB -BCB 0 0 0 0 0 0 -BG -BLG*pblG LCB eFrow*peF - OFBH 0 0 0 0 0 49 Table 1. The Balance Sheet Matrix of a REE (Continued) Relations with the Rest of the World Domestic Economy Firms Households Banks CB Cash Off-shore Deposits xr*$CashF xr*$MrowF xr*$CashH xr*$MrowH xr*$CashB xr*$MrowB Foreign Government Bills xr*$BG-rowF xr*$BG-rowH xr*$BG-rowB xr*$CashCB xr*$MrowCB xr*$BG- xr*$BLG- xr*$BLG- xr*$BLG- Gov Balance F, H, B, CB, Gov Foreign Currency Financial Assets Foreign Government Bonds row F row *$pblG-row Foreign Corporate (Firm) Bonds Foreign Credit Loans H *$pblG-row xr*$BLFrow row row CB B *$pblG-row H *$pblF-row -xr*$LF row -xr*$LBrow xr*$erowH *$perow Foreign Equities Domestic Bank Reserves Domestic Deposits xr*$MBF xr*$MBH xr*$BRes -xr*$MB Domestic (Sovereign) Government Bonds xr*$BLGF *$pblG xr*$BLGH *$pblG xr*$BLGB *$pblG Domestic Corporate (Firm) Bonds -xr*$BLF *$pblF xr*$BLFH *$pblF Domestic Credit Loans Balance Sum -xr*$LFB VF 0 VH 0 xr*$LB 0 0 -xr*$Cashrow -xr*$Mrow 0 0 -xr*$BG-row 0 -xr*$BLG-row *$pblG-row 0 -xr*$BLF-row *$pblF-row 0 xr*$Lrow 0 -xr*$erow *$perow 0 -xr*$BRes xr*$MBrow -xr*$BLG *$pblG 0 0 xr*$BLGrow *$pblG 0 xr*$BLFrow *$pblF 0 0 -(IN+K) 0 VCB VG Vrow 0 0 0 50 Table 2. Revaluation Matrix of a REE Relations with the Rest of the World Domestic Economy Firms Households Δp*k- Δp*k-1H Government Bonds ΔpblG*BLG- ΔpblG*BLG-1H ΔpblG*BLG-1B Firm Bonds -ΔpblF*BLF- ΔpblF*BLF-1H ΔpblF*BLF-1B -ΔpeF*eF-1 ΔpeF*eF-1H {ΔOFBH} Real Assets Fixed Capital Local Currency Financial Assets Firm Equities Bank Capital Banks {-ΔOFB CB Gov Balance F, H, B, CB, Gov Δp*k-1G Δp*k-1 -ΔpblG*BLG-1 0 0 ΔpeF*eF-1row 0 0 H} Foreign Currency Financial Assets Cash Δxr*$Cash- Δxr*$Cash-1H Δxr*$Cash-1B Δxr*$Cash-1CB -Δxr*$Cashrow-1 0 Off-shore Deposits Δxr*$Mrow- Δxr*$Mrow-1H Δxr*$Mrow-1B Δxr*$Mrow-1CB -Δxr*$Mrow-1 0 Foreign Gov Bills Δxr*$Brow- Δxr*$Brow-1H Δxr*$Brow-1B Δxr*$Brow-1CB -Δxr*$Brow-1 0 Foreign Gov Bonds Foreign Firm Bonds $BLG−row$BLG−row-1H * * [(Δxr*$pblG−row) [(Δxr*$pblG−row) + + (Δ$pblG−row*xr-1)] (Δ$pblG−row*xr-1)] $BLF−row-1H * [(Δxr*$pblF−row) + (Δ$pblF−row*xr-1)] -$BLG−row-1 * [(Δxr*$pblG−row) + (Δ$pblG−row*xr-1)] -$BLF−row-1 * [(Δxr*$pblF−row) + (Δ$pblF−row*xr-1)] 0 0 51 Table 2. Revaluation Matrix of a REE (Continued) Relations with the Rest of the World Domestic Economy Firms Households Banks CB Gov Balance F, H, B, CB, Gov Foreign Currency Financial Assets (Continued) Foreign Loans -Δxr*$LF-1row -Δxr*$LB-1row H $erow-1 * [(Δxr*$perow) + (Δ$perow*xr-1)] Foreign Equities Domestic Bank Reserves Domestic Deposits Δxr*$BRes-1 Δxr*$MB- Δxr*$MB-1H Domestic (Sovereign) Government Bonds $BLG* [(Δxr*$pblG) + (Δ$pblG*xr-1)] $BLG-1H * [(Δxr*$pblG) + (Δ$pblG*xr-1)] Domestic Corporate (Firm) Bonds -$BLF-1 * [(Δxr*$pblF) + (Δ$pblF*xr-1)] $BLF-1H * [(Δxr*$pblF) + (Δ$pblF*xr-1)] Domestic Loans -Δxr*$LF-1B 0 -$erow-1 * [(Δxr*$perow) + (Δ$perow*xr-1)] 0 -Δxr*$BRes-1 0 -Δxr*$MB-1 -$BLG-1 * [(Δxr*$pblG) + (Δ$pblG*xr1)] Δxr*$L-1B Δxr*$L-1row Δxr*$MB, -1row 0 $BLG-1row * [(Δxr*$pblG) + (Δ$pblG*xr-1)] 0 $BLF-1row * [(Δxr*$pblF) + (Δ$pblF*xr-1)] 0 0 52 Table 3. Transaction Matrix of a REE Firms Cur Cap Income process Consumption Gov Expenditures Fixed Investment Inventory Acc. Exports Imports GDP Income Tax Wages Inventory Financing Cost Entrepreneurial Profits Bank Profits CB Profits C Domestic Economy Households Banks Cur Cap Cur Cap CB Cur Cap -C -FF -G -IF -ΔIN -IH 0 -IG -X xr*IMC +xr*IMIG +xr*IMK Y -TH WB FUFF FDFH +rBF-1 *BF-1H +BLF-1H +xr* $BLF-1H FDBH Balance 0 G I ΔIN X -xr*IMC xr*IMIG -xr*IMK -Y -TF -WBF -rL-1 *IN-1 Gov Cur Cap Row F, H, B, CB, Gov Cur Cap -TB 0 0 0 0 T -WBG rL-1 *IN-1 rBF-1*BF-1B +BLF-1B +rL-1*[LF-1B -NPL- IN-1] -rM-1*M2-rBB-1*BB+xr* [$rL-1B*$LF-1B -$rM-1B*$MB-1F] -FB FUBB 0 0 0 0 -rBG-1 *BG-BLG-xr* $BLG- -FCB FCB G xr* [$BLF-1row -$rM-1row *$Mrow-$rBG,row-1 *$BG,row-$BLG,row-1F] 0 0 0 53 Table 3. Transaction Matrix of a REE (Continued) Domestic Economy Households Firms Cur Rent Transfers Local Currency Saving Account Deposits Cur rM-1 *M2-1H rBG-1 *BG-1H Cap Cur CB Cap Cur Bank Bills, CDs rBB-1 *BB- rBB-1 *BB-1H -rM-1 *M2-1 rBG-1 *BG-1B rBCB-1 *BCB-1B -rBB-1 *BB-1 Government Bonds BLG- BLG-1H BLG-1B -rL-1 *LH-1 rL-1 *LH-1 -rLCB-1 *L-1 rLCB-1 *L-1CB xr *$rM*-1 *$Mrow-1B xr *$rB*-1 *$Brow-1B xr *$rM*-1 *$Mrow-1CB xr *$rB*-1 *$Brow-1CB Government Bills rM-1 *M2rBG-1 *BG- Cap Banks Central Bank Bills, CDs Credit Loans Lender of Last Resort Foreign Currency Off-shore Deposits Foreign Government Bills xr *$rM*-1 *$Mrowxr *$rB*-1 *$Brow- xr *$rM*-1 *$Mrow-1H xr *$rB*-1 *$Brow-1H Gov Cap Cur Cap Row F, H, B, CB, Gov Cur Cap Balance 0 rBG-1 *BG-1CB -rBCB-1 *BCB-1 -rBG-1 *BG-1 0 0 0 -BLG-1 0 0 0 -xr *$rM*-1 *$Mrow-1 -xr *$rB*-1 *$Brow-1 0 0 54 Table 3. Transaction Matrix of a REE (Continued) Domestic Economy Households Banks Firms Cur Rent Transfers Foreign Currency Foreign Government Bonds Foreign Corporate (Firm) Bonds xr *$BLG-row- Foreign Credit Loans -xr *$rL*-1 *$LF-1row Cap Cur Cap Cur Cap CB Cur Gov Cap Cur -xr *$BLG-row- xr *$BLG-row-1H -xr *$BLF-row-1 -xr *$rL*-1 *$LB-1row xr *$rL*-1 *$LB-1row -xr *$FDF-row xr *$FDF-rowH xr *$rB*-1 $BRes Domestic Bank Reserves Domestic Deposits xr *$rM-1 *$M- xr *$rM-1 *$M-1H Domestic (Sovereign) Government Bonds xr *$BLG- xr *$BLG-1H 0 1 xr *$BLF-row-1H Foreign Equities Cap Row F, H, B, CB, Balance Gov Cur Cap -xr *$rB*- 0 0 0 0 1 $BRes -xr *$rM-1 *$M-1 -xr *$BLG-1 xr *$rM-1 *$M-1row 0 xr *$BLG-1row 0 55 Table 3. Transaction Matrix of a REE (Continued) Firms Cur Cap Stock Variations Local Currency Cash Bank Reserves Govt. Dep. in CB Current Account Deposits Saving Account Deposits Govt. Bills Central Bank Bills, CDs Bank Bills, CDs Firm Bills, Comm. Paper Govt. Bonds Corporate (Firm) Bonds Credit Loans Loan Defaults Lender of Last R. Firm Equities -ΔCashF Households Cur Cap -ΔCashH Domestic Economy Banks CB Cur Cap Cur Cap -ΔCashB -ΔBResB ΔCashCB ΔBResCB ΔGDCB -ΔM1F -ΔM1H ΔM1 -ΔM2F -ΔM2H ΔM2 -ΔBGF -ΔBGH -ΔBGB -ΔBGCB -ΔBCBB ΔBCB -ΔBBF ΔBF ÷(1+ΩbF) -ΔBLGF *pblG ΔBLF *pblG ÷(1+ΩblF) ΔLFB NPL ΔeF*peF -ΔBBH -ΔBFH ÷(1+ΩbF) -ΔBLGH *pblG -ΔBLFH *pblG ÷(1+ΩblF) ΔLHB -ΔeFH*peF ΔBB -ΔBFB ÷(1+ΩbF) -ΔBLGB *pblG -ΔBLFB *pblG ÷(1+ΩblF) -ΔLB -NPL ΔLB Gov Cur Cap Row F, H, B, CB, Gov Balance Cur Cap -ΔCashG -ΔGDG 0 0 0 -ΔM1G 0 0 ΔBG 0 0 0 0 ΔBLG *pblG -ΔBLGrow *pblG -ΔBLFrow *pblG ÷(1+ΩblF) 0 0 0 0 0 -ΔLCB -ΔeFrow *peF 0 56 Table 3. Transaction Matrix of a REE (Continued) Firms Cur Cap Domestic Economy Households Banks Cur Cap Cur Cap Cur CB Cap Gov Cur Cap Row F, H, B, CB, Gov Cur Cap Balance Foreign Curr. Cash Deposits abroad Foreign Govt. Bills Foreign Govt. Bonds xr*Δ$CashF -xr*Δ$CashH -xr*Δ$MrowF -xr*Δ$MrowH -xr *Δ$BrowF -xr *Δ$BLG-rowF *$pblG-row -xr *Δ$BrowH -xr *Δ$BLG-rowH *$pblG-row -xr *Δ$BLF-rowH *$pblF-row Foreign Firm Bonds Foreign Loans Foreign Equities Domestic Bank Reserves Domestic Dep. Domestic Govt. Bonds Domestic Firm Bonds Domestic Loans Loan Defaults Sum xr*Δ$LFrow xr*Δ$Cash xr*Δ$CashC xr*Δ$Cashro B B w xr*Δ$MrowB -xr *Δ$BrowB xr*Δ$MrowCB -xr *Δ$BrowCB xr*Δ$Mrow xr *Δ$Brow xr *Δ$BLG-row *$pblG-row xr *Δ$BLF-row *$pblF-row -xr*Δ$Lrow xr*erow *Δ$perow xr*Δ$LBrow H -xr*erow *Δ$perow -xr*Δ$MBF -xr*Δ$MBH -xr*Δ$BLGF *$pblG -xr*Δ$BLGH *$pblG xr *Δ$BLF *$pblF -xr *Δ$BLFH *$pblF -xr* Δ$BRes xr*Δ$MB xr* Δ$BRes 0 0 0 0 0 0 0 0 xr *Δ$BLG *$pblG -xr*Δ$MBrow -xr *Δ$BLGrow *$pblG -xr *Δ$BLFrow *$pblF 0 0 0 xr*Δ$LFB -xr*Δ$LB 0 NPL 0 -NPL 0 0 0 0 0 0 0 57 58 59 60 61 62 63 64 65 66