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1 Macroeconomic Macroeconomic Frameworks & Financial Frameworks & Financial Programming Programming Overview Jan Gottschalk TAOLAM This training material is the property of the IMF – Singapore Regional Training Institute (STI) and is intended for the use in STI courses. Any reuse requires the permission of the STI. Central Bank of Myanmar - TAOLAM “Introduction to Financial Programming” December 16-20, 2013 Yangon, Myanmar

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Page 1: Macroeconomic Frameworks & Financial Programming · Macroeconomic Frameworks & Financial Programming Overview Jan Gottschalk TAOLAM This training material is the property of the IMF

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Macroeconomic Macroeconomic Frameworks & Financial Frameworks & Financial

ProgrammingProgrammingOverviewJan Gottschalk

TAOLAM

This training material is the property of the IMF – Singapore Regional Training Institute (STI) and is intended for the use in STI courses. Any reuse requires the permission of the STI.

Central Bank of Myanmar - TAOLAM“Introduction to Financial Programming”

December 16-20, 2013 Yangon, Myanmar

Page 2: Macroeconomic Frameworks & Financial Programming · Macroeconomic Frameworks & Financial Programming Overview Jan Gottschalk TAOLAM This training material is the property of the IMF

2

Central Bank of Myanmar - TAOLAM“Introduction to Financial Programming”

December 16-20, 2013 Yangon, Myanmar

I. Macroeconomic FrameworksOverviewOverview

II. Financial Programming for Informed Economic Policy Decision-Making

Central Bank of Myanmar - TAOLAM“Introduction to Financial Programming”

December 16-20, 2013 Yangon, Myanmar

Capturing linkages between sectorsI. MacroeconomicI. Macroeconomic FrameworksFrameworks

Fiscal Policies

Real Sector

G; T

Monetary financingInterest

rates/exchange rateCA=S-I

MonetaryPolicies

Balance of Payments RM=NFA+NDc

Page 3: Macroeconomic Frameworks & Financial Programming · Macroeconomic Frameworks & Financial Programming Overview Jan Gottschalk TAOLAM This training material is the property of the IMF

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Central Bank of Myanmar - TAOLAM“Introduction to Financial Programming”

December 16-20, 2013 Yangon, Myanmar

A macroeconomic framework captures accounting linksREAL SECTOR

Private consumptionGeneral government consumption

National Accounts (local currency, flows)

GENERAL GOVERNMENT

Fiscal Accounts (local currency, flows)RevenuesGrants

ExpendituresCurrentGeneral government consumption

(Wages+Goods and services)

Private investmentGeneral government investment

Exports of goods and nonfactorservices

Imports of goods and nonfactorservices

EXTERNAL SECTOR

Balance of Payments (US Dollars, flows)

CURRENT ACCOUNTExports of goods and nonfactorservices

Imports of goods and nonfactorservices

Factor services (net)Transfers (net)

CurrentCapital

Overall balanceFinancing

Domestic financing (net)Banking systemNonbanking sector

External financing (net)

Net foreign assets

Net domestic assets:Net credit to governemnt sectorCredit to banksOther items (net)

Reserve money Currency

Monetary Authorities (local currency, stocks)

MONETARY SECTOR

Transfers (net)OfficialPrivate

CAPITAL ACCOUNTDirect investmentMedium/long-term capital (net)

Private sector (o/w banks)Centr. Government

Short-term capital (net)Private sector (o/w banks)

Centr. GovernmentOverall balanceReserves (Change in net foreign assets)

Banks reserves

Net foreign assets

Banks' reserves

Net domestic assets:Net credit to government sectorCredit to nongovernment sectorOther items (net)

Liabilities to monetaryauthorities

Private sector deposits

Deposit Money Banks (local currency, stocks)

Central Bank of Myanmar - TAOLAM“Introduction to Financial Programming”

December 16-20, 2013 Yangon, Myanmar

Example of Inflation DeterminantsExample of Inflation Determinants… but it is not very good at capturing behavioral linkages!

Πprice inflation

Page 4: Macroeconomic Frameworks & Financial Programming · Macroeconomic Frameworks & Financial Programming Overview Jan Gottschalk TAOLAM This training material is the property of the IMF

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Central Bank of Myanmar - TAOLAM“Introduction to Financial Programming”

December 16-20, 2013 Yangon, Myanmar

Which is why you cannot run the macroeconomic framework on autopilot!

Central Bank of Myanmar - TAOLAM“Introduction to Financial Programming”

December 16-20, 2013 Yangon, Myanmar

II. Financial Programming for Informed II. Financial Programming for Informed Economic Policy DecisionEconomic Policy Decision--MakingMaking

Developing aDeveloping a financial program involves• Analysis of current

conditions & forecasting

• Identification of policy measures & and their impact

• Iteration

Page 5: Macroeconomic Frameworks & Financial Programming · Macroeconomic Frameworks & Financial Programming Overview Jan Gottschalk TAOLAM This training material is the property of the IMF

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Central Bank of Myanmar - TAOLAM“Introduction to Financial Programming”

December 16-20, 2013 Yangon, Myanmar

Aims of a Financial Program

Financial ProgramFinancial ProgramComprehensive set of coordinated economic

policies

MacroeconomicstabilityDirect Aim

Credibility / market expectations

Central Bank of Myanmar - TAOLAM“Introduction to Financial Programming”

December 16-20, 2013 Yangon, Myanmar

Iterations to Form a Monetary Policy Program

A. Program Objectives

Where are we?

Wh h

Are we going to be on track?

C. Consistent Program

Projections

B. Policy Measures

What can we do?

What are the effects?

Page 6: Macroeconomic Frameworks & Financial Programming · Macroeconomic Frameworks & Financial Programming Overview Jan Gottschalk TAOLAM This training material is the property of the IMF

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Central Bank of Myanmar - TAOLAM“Introduction to Financial Programming”

December 16-20, 2013 Yangon, Myanmar

Where Are We?Begin by taking stock of current macroeconomic situation

• Create baseline• Create baseline projection under unchanged policies

• Be mindful of incomplete information: weinformation: we only see parts of the past and the future is just a guess!

Central Bank of Myanmar - TAOLAM“Introduction to Financial Programming”

December 16-20, 2013 Yangon, Myanmar

What Can We do?Depends on the problem …

• Inflation demand• Inflation demand management

• External imbalances demand management plus expenditure switching policiespolicies

• Protracted imbalances structural reforms

Page 7: Macroeconomic Frameworks & Financial Programming · Macroeconomic Frameworks & Financial Programming Overview Jan Gottschalk TAOLAM This training material is the property of the IMF

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Central Bank of Myanmar - TAOLAM“Introduction to Financial Programming”

December 16-20, 2013 Yangon, Myanmar

Fiscal

Revenue

Tax rateTax baseTax administrationConsumptionInterest

Demand Management Policy Tree

Demand Management

Policies Expenditure

Financing

InterestTransfersInvestment

SeigniorageDebt

Monetary Policies

MoneyCreditInterest rateExchange rateInflation targetDollarization

Reserve requirementsOMOsRediscountsFX swaps

Central Bank of Myanmar - TAOLAM“Introduction to Financial Programming”

December 16-20, 2013 Yangon, Myanmar

Exchange rate policy

Expenditure Switching Policy Tree

ExpenditureSwitching

Income policy

Wage Policy

Price Policy

Trade policy

Tariffs

Quotas

Export Promotion

Page 8: Macroeconomic Frameworks & Financial Programming · Macroeconomic Frameworks & Financial Programming Overview Jan Gottschalk TAOLAM This training material is the property of the IMF

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Central Bank of Myanmar - TAOLAM“Introduction to Financial Programming”

December 16-20, 2013 Yangon, Myanmar

Improve Resource Allocation

Price Reform

Enterprise Reform

Fiscal Reform

Liberalization

Hard Budget ConstraintTax SystemExpenditure St t

Structural Policy Tree

Increase Output(Supply-side

Allocation Fiscal Reform

Financial Sector Reform

Labor Market Reform

Increase Investment

StructureSocial Safety NetsCash Management(Treasury)

SupervisionRecapitalize banksPrivatizeIncrease SavingCapital MarketPolicies) in Physical and

Human Capital

Increase Investment

Return

Expand Productive Capacity

Increase Total Factor Productivity

Capital MarketHealth and EducationInterest RatesForeign Direct InvestmentRole of Public Enterprise ReformR & D, FDI

Central Bank of Myanmar - TAOLAM“Introduction to Financial Programming”

December 16-20, 2013 Yangon, Myanmar

What Are the Effects?Analysis of effects of policy are likely to be highly uncertain because of:

• Limited data• Limited

understanding of behavioral linkages Ackno ledge Acknowledge

uncertainty!

Page 9: Macroeconomic Frameworks & Financial Programming · Macroeconomic Frameworks & Financial Programming Overview Jan Gottschalk TAOLAM This training material is the property of the IMF

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Central Bank of Myanmar - TAOLAM“Introduction to Financial Programming”

December 16-20, 2013 Yangon, Myanmar

Dealing with UncertaintyyThe challenge is not to avoid mistakes but to learn from them:

• Forecast error analysis

• Learning from mistakes

• Incremental policy stepsp y p

Central Bank of Myanmar - TAOLAM“Introduction to Financial Programming”

December 16-20, 2013 Yangon, Myanmar

If yes, you are are done.

Are We Going to Be on Track?

If not …

• Calibrate the policy measures, and …

h• … run another iteration of projections

Page 10: Macroeconomic Frameworks & Financial Programming · Macroeconomic Frameworks & Financial Programming Overview Jan Gottschalk TAOLAM This training material is the property of the IMF

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Central Bank of Myanmar - TAOLAM“Introduction to Financial Programming”

December 16-20, 2013 Yangon, Myanmar

Thank You!

And good luck …