Lecture 1-Macro Frame _ Fin Prog_Overview_2015

Lecture 1-Macro Frame _ Fin Prog_Overview_2015 -...

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Macroeconomic Policy Analysis in Low Income Countries THE MACROECONOMIC FRAMEWORK and the THEORY of FINANCIAL PROGRAMMING By Dr. Mark Ellyne
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Course Assessment Lecture and Tutorials (required) Weekly assignment (7-8 weeks) – 50% Project and presentation – 50% 2
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Course will teach you: How to analyse a country like the IMF does, using financial programming and the 4-sector approach to the economy: Basic forecasting of macro variables How to build a simple model of an economy Understand sectoral linkages and Consistency Policy diagnosis and advice 3
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To Analyze the Economy We Need a Model To conceptualize the economy To understand transmission mechanism To provide a coherent framework To make better policy Evidence-based economic analysis 4
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Financial Programming Framework 1) Real Sector - National income accounts Output (GDP) and Prices 2) External sector - Balance of Payments Exchange rate Trade and capital flows Foreign debt 3) Fiscal - Government Budget Fiscal deficit Domestic borrowing and Public debt 4) Money and banking – Monetary Survey Money and the interest rate 5
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6 REAL Output Prices EXTERNAL Foreign Inflows Trade Flows Foreign Reserves Foreign Prices FISCAL Tax Revenue &Grants Expenditure Foreign Financing Domestic Financing (T-Bills) MONETARY Credit to Government Credit to Economy NFA OUTPUT DEMAND Exchange Rate PPP Interest Rates PRICES ABSORBTION NFA NCG DEMAND NCP IMPORTS, DONOR AID
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Strategy Build accounting framework with behavioural equations where appropriate Create a “ No-Policy-Change ” Scenario for future projections Identify future problems/disequilibria Determine what policy changes are needed to correct disequilibria 7
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How Does Financial Programming Work? Create sectoral projections for the real sector, the balance of payments, and the fiscal deficit. Then check to see if they are consistent in the monetary context. Need to understand the sources of money supply and demand. 8
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Money Supply and Demand 9 Money Demand/Supply M = NFA + NCG + NCP External Net Foreign Assets Government Net Credit to Government Private Net Credit to Private Sector
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Assets Net foreign assets (NFA) Central bank Comm. Banks Domestic Credit Net claims on govern. (NCG) Net claims on private sector (NCP) Other items, net (OIN) Liabilities Broad Money (M3) Foreign currency deposits M2 Time & savings deps. M1 Currency in circulation Demand depos. 10 Structure of the Monetary Survey
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Sectoral Linkages of the Monetary Accounts Accounting Behavioral determinants Net foreign asset BOP ∆NFA = Change in Foreign Reserves Net domestic credit to gov. Gov Domestic borrowing = Deficit – Foreign borrowing Net domestic credit to private Real NCP = η GDP – βr Other items net Banks Valuation adjustments, bank capital and profits Broad money Money QTM: Mv=PY 11
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What is the Correct Money Supply?
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