Transcript The Macroeconomic Framework

The Macroeconomic Framework
Given a set of macroeconomic goals
and a policy framework,
a macroeconomic framework is
a set of sectoral projections (for the real, external,
fiscal, and monetary sectors)
consistent with each other,
consistent with the policy framework,
and consistent with the macroeconomic goals
Examples of macroeconomic goals
• Preserve macro stability—growth at around 7%,
inflation below 5%, keep government debt on a
sustainable path, and build-up official reserves
• Engineer a soft landing from unsustainable
growth rates
• Lower inflation to single digits
• Fiscal consolidation: Reduce debt to X% of GDP
by 2008
• Return the BOP to sustainability by reducing the
current account deficit to X% of GDP over the
medium term
Elements/examples of a policy
framework
• Fiscal responsibility legislation
• Exchange rate regime
• Inflation targeting or reserve money
targeting frameworks for monetary policy
• Structural policies
Real sector projections
• GDP
Production approach: GDP= sum of value
added across sectors
Expenditure approach: GDP=C+I+X-M
Ensure consistency with fiscal accounts (C
and I) and the BOP (X and M)
Key link with BOP: S-I=CAB
where S=National saving=GDP+Net Foreign
Income+Net transfers-Consumption
• Prices: CPI and GDP deflator
Exchange rate regime
What are cost pressures raising prices?
What is the stance of economic policies?
Estimate impact of changes to regulated
prices, competition policy, or trade policy
Forecasting the BOP
• Decide appropriate level of disaggregation for
projections
• Consider developments in economies of main
trading partners; terms of trade; competitiveness
trends
• Consistency with fiscal accounts: Grants and
loan disbursements/repayments
• Key lines in Bhutan: X and M; Transportation
and travel; factor income; remittances and
grants; government loans.
Projections for fiscal accounts
• Revenues:
 Tax revenue: First do “passive” projections,
based on existing policies. Then, add/subtract
from expected policy changes.
 Non-tax revenue: Key in Bhutan (dividends,
profit transfers, and operating surpluses of
departmental enterprises). It pays to work out
detailed projections by source.
 Grants: Key in Bhutan. Need to be realistic and
coordinate closely with donors. Retain flexibility
in executing fiscal policy.
• Expenditures
Key lines in Bhutan: wages; interest
payments; capex; and net lending.
• Financing: Foreign—disbursements and
amortization; and domestic—bank and
non-bank.
Monetary projections
• Estimating a demand for money consistent
with growth and inflation projections
P Y=M V
• Monetary survey: NFA linked to BOP;
Government credit from the fiscal
accounts; and private net domestic credit
usually a residual.
• But is private sector credit growth
consistent with growth projections?
Developing a macro framework is
an iterative process
• Initial projections may expose some
tensions/imbalances between outcomes,
goals and policies
 Need to calibrate:
Nature, seriousness, and source of the imbalances
Possible rememedies