National Income, BOP Accounting and Central Banking

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National Income, BOP Accounting and Central
Banking

• Monetary Theory and Policy
• UFM
• Summer, 2006

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1. National Income Accounting

• Y C I G CAS Y C G
• Sp I CA Sg I CA (T G) I CA (G
  T)
• Private saving (Sp) The part of disposable
  income that is saved rather than consumedT is
  the government's income (its net tax revenue)
• Sg is government savings (T-G)

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Four different ways to describe the current
account

• a. change in net foreign assets
• b. national saving net of investment
• c. income minus absorption
• d. trade balance plus net factor payments from
  abroad
• absorption approach, elasticity approach
• Issues
• Causes of current account deficit
• Adding up the world CA is not equal to 0?

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2. The Balance of Payments Accounts

• CA FA 0
• CA FA OSA 0
• CA FA BOP
• CA FA KA S O OSA 0
• A countrys balance of payments accounts keep
  track of both its payments to and its receipts
  from foreigners.
• Every international transaction automatically
  gives rise to two offsetting entries in the
  balance of payments resulting in a fundamental
  identity once as a credit () and once as a
  debit (-).

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The Balance of Payments Accounts

• THE BALANCE OF PAYMENTS is a record of all
  transactions between domestic residents and the
  rest of the world. Examples goods and services,
  license fees, interest income, dividends, real
  assets (factories, land), financial assets
  (stocks, bonds, bank deposits, loans), unilateral
  transfers (foreign aid, private gifts).
• Rule Sell something to rest of world, receive
  payment? enters as credit (). Buy something
  from rest of the world, make payment ? enters as
  debit (-).
• Think all international transactions require
  foreign currency. All credit transactions give
  rise to supply of foreign exchange. All debit
  transactions give rise to demand for foreign
  exchange.

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The Balance of Payments Accounts

• Three types of international transactions are
  recorded in the balance of payments
• Exports or imports of goods or services
• recorded in the current account
• Purchases or sales of financial assets
• recorded in the financial account
• Transfers of wealth between countries
• recorded in the capital account.

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The Balance of Payments Accounts

• Examples of Paired Transactions
• A U.S. citizen buys a 1000 typewriter from an
  Italian company, and the Italian company deposits
  the 1000 in its account at Citibank in New York.
• That is, the U.S. trades assets for goods.
• This transaction creates the following two
  offsetting entries in the U.S. balance of
  payments
• It enters the U.S. CA with a negative sign
  (-1000).
• It shows up as a 1000 credit in the U.S.
  financial account.

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The Balance of Payments Accounts

• A U.S. citizen pays 200 for dinner at a French
  restaurant in France by charging his Visa credit
  card.
• That is, the U.S. trades assets for services.
• This transaction creates the following two
  offsetting entries in the U.S. balance of
  payments
• It enters the U.S. CA with a negative sign
  (-200).
• It shows up as a 200 credit in the U.S.
  financial account.

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The Balance of Payments Accounts

• A U.S. citizen buys a 95 newly issued share of
  stock in the United Kingdom oil giant British
  Petroleum (BP) by using a check drawn on his
  stockbroker money market account. BP deposits the
  95 in its own U.S. bank account at Second Bank
  of Chicago.
• That is, the U.S. trades assets for assets.
• This transaction creates the following two
  offsetting entries in the U.S. balance of
  payments
• It enters the U.S. financial account with a
  negative sign (-95).
• It shows up as a 95 credit in the U.S. financial
  account.

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CA 4 components

• Commodity Service Factor
  Income Unilateral Transfer IssuesN
  et international investment position (ex.
  USA)Negative 5 is the threshold for currency
  crisisPersistent, sustainable, excessive, and
  solventA mirror of FAInternational risk
  portfolio diversificationStock and flow view of
  CA

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FA 3 components

• Foreign Direct Investment Portfolio
  Investment (stock and bond) Other
  Investment (bank loans)
• IssuesLiberalization of FA Pace, sequence,
  volume of capital mobilityPolicy response to
  capital inflowEconomic growth and types of
  capital flowComponents of FA and its effect on
  CA (S I)MA (Merger and Acquisition)Pension
  fund, mutual fund, and hedge fund Capital
  account crisis

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OSA (-BOP)

• Change of foreign reserves
• Issues
• BOP crisis
• Over-holding of foreign reserves (3-6 months of
  imports) cost and benefit (ex. Asian countries
  after crisis)
• Flow and stock (total reserves minus gold)

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3. Central Bank Balance Sheet

• B monetary base, includes currency and
  commercial bank reserves or deposits at the
  central bank.D domestic credit, includes US
  treasury debt and discount lending foreign
  exchange reserves
• IssuesCentral Banks Balance SheetHolding
  reservesForeign exchange market intervention
  SterilizationMonetization of government debt