Presentation on theme: "The Macroeconomic Framework"— Presentation transcript:
1 The Macroeconomic Framework Given a set of macroeconomic goalsand a policy framework,a macroeconomic framework isa 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
2 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 reservesEngineer a soft landing from unsustainable growth ratesLower inflation to single digitsFiscal consolidation: Reduce debt to X% of GDP by 2008Return the BOP to sustainability by reducing the current account deficit to X% of GDP over the medium term
3 Elements/examples of a policy framework Fiscal responsibility legislationExchange rate regimeInflation targeting or reserve money targeting frameworks for monetary policyStructural policies
4 Real sector projections GDPProduction approach: GDP= sum of value added across sectorsExpenditure approach: GDP=C+I+X-MEnsure consistency with fiscal accounts (C and I) and the BOP (X and M)Key link with BOP: S-I=CABwhere S=National saving=GDP+Net Foreign Income+Net transfers-Consumption
5 Prices: CPI and GDP deflator Exchange rate regimeWhat are cost pressures raising prices?What is the stance of economic policies?Estimate impact of changes to regulated prices, competition policy, or trade policy
6 Forecasting the BOPDecide appropriate level of disaggregation for projectionsConsider developments in economies of main trading partners; terms of trade; competitiveness trendsConsistency with fiscal accounts: Grants and loan disbursements/repaymentsKey lines in Bhutan: X and M; Transportation and travel; factor income; remittances and grants; government loans.
7 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.
8 ExpendituresKey lines in Bhutan: wages; interest payments; capex; and net lending.Financing: Foreign—disbursements and amortization; and domestic—bank and non-bank.
9 Monetary projectionsEstimating a demand for money consistent with growth and inflation projectionsP Y=M VMonetary 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?
10 Developing a macro framework is an iterative process Initial projections may expose some tensions/imbalances between outcomes, goals and policiesNeed to calibrate:Nature, seriousness, and source of the imbalancesPossible rememedies