The documentation of the domestic side of the SAM representation explains equilibrating dynamics of two kinds: those around goods and service markets and fluctuations in inventories or stocks (both by sector via relative prices and overall via interest rates) and those around financial assets and liabilities of agent-classes (via adjustment multipliers sensitive to the level of debt), especially government debt. On the international side of the SAM structure, the key equilibrating dynamic centers on the total level of international debt of a country. Changes in foreign reserves and short-term governmental borrowing play important short-term buffering roles Exchange rates are the key longer-term equilibrating variable.
Conceptual foundations for the dynamics build largely on two concepts: current account balance (CURACT) and capital account balance (CAPACT). Although in terms of definition they are equal with opposite signs, it is more complicated than that. Current account equals the trade balance (TRADEBAL) of relative-price adjusted exports (XRPA) minus imports (MRPA), plus the net outflow of foreign aid (AID), plus foreign workers’ remittances to home countries, plus pension payments to retirees living abroad, plus the rents, interest, profits, and dividends paid on past capital inflows. Capital account equals the net inflow of underlying capital flows (the change in stocks), both long-term and short-term. The long-term includes foreign direct investment; the short term includes hot money in bank deposits and T-bills.
Although the current and capital accounts must balance, the balance often relies in the very short term on residual changes in stocks, namely reserve holdings and reactive government borrowing. In the longer-term exchange rate and interest rate fluctuations help maintain the balance by affecting the dynamics of the more slowly adjusting trade and longer-term financial flows. IFs brings together most of these elements in its representations of the international financial dynamics around the SAM.
IFs computes the current account balance from the elements indicated above, except that pension liabilities abroad are not represented. Although actual foreign direct investment and portfolio flows belong in the capital account (see below), the net earnings on the assets abroad and in-country belong in the current account. In the formulation below, not all government or firm debt is represented as a basis for generating international flows, only international government debt (XGOVTDEBT, not GOVDEBT, which is also different in that it in IFs it is a percent of GDP) and only international firm debt (XFIRMDEBT).
Most of the above formulation is focused on determining the net interest, profit, dividend flows, which are specified as an exogenous real interest rate ( lintr ) times the net stocks of assets mostly discussed earlier.
IFs computes a limited (or partial) capital account balance from the elements of the capital account over which the government normally has least direct control. The limited capital account balance purposefully excludes the two equilibrating elements of changes in reserves and short-term government compensatory borrowing.
The current and capital accounts come together in the determination of external balancing debt. The model makes no assumption that it can anticipate a government’s relative choice between changes in reserves and changes in debt taken on for balancing purposes (XGOVTDEBTB) to satisfy the discrepancy between the current and capital accounts. . In addition to updating current year values of that debt with current and capital account information (in IFs the sign on capital account is reversed from that on the current account, so both are subtracted), the loan portion of foreign aid (LoanPortionAid), determined by the parameter
, is also added to the debt.
Total external governmental debt is set as the basic debt plus (normally longer-term) IFI credits and loans.
Total external debt is the sum of governmental indebtedness and firm debt.
Although IFs does not separate out reserve position changes from this debt, it has begun to develop an initial representation of reserves (XRESERVES) and at some point that separation may occur. Currently the equations (not shown) simply move XRESERVES from the initial portion of GDP toward 15 percent of GDP. That allows a quick calculation of liquidity as the current account ratio to the reserves.
External Debt for exchange rates and external accounts balancing
Exchange rates are a function of external debt, using a PID controller mechanism to maintain relative balance with a target over time of "TypicalDebt" at a given GDP per capita level. The target can be modified with an exogenous parameter ( repayrm ).
The exchange rates change with a multiplier computed from the debt levels, where the multiplier and therefore the change use the PID adjuster function of IFs so as to control movement toward equilibrium with both the absolute debt level and the change in it. The exchange rate term is also imbedded in a moving average formulation, pulling it very slowly back toward its initial index value of 1.0.
The parameters used in the exchange rate adjustment above are second-order parameters computed from exogenous specifications ( elerca1, elerca2 ). For entrepot economies with a high ratio of trade to GDP, the parameters are scaled back so as to avoid over-reaction.
Foundations in the preprocessor for extending treatment of debt
With debt, initialization of concepts with data was a challenge. The first step in the initialization of all financial stocks within the pre-processor is the processing of data on total external debt of countries (XDEBTRPA). The raw data came from the WDI. Null values for developing countries are filled with zeros. Unfortunately, external debt data from the WDI are for developing countries only and there are no corresponding asset data for the lending countries, presumably mostly developed countries. As in other such instances, the pre-processor now assigns the total of external debt of developing countries to developed countries, defined for this purpose as countries with no external debt indicated and GDP per capita of $10,000 or more. The assignment is proportional to GDP of the more developed countries. Both the presumption that more developed countries are primarily asset holders and the proportional assignment are clearly inaccurate. The rationale for both is that the resultant stock assumptions, on average, are almost certainly better than assumptions that asset stocks of such countries are uniformly zero. Further, the dynamics of the model will be more greatly determined by change in stocks from initial levels than by the absolute values of them. Nonetheless, data on these assets would be highly desirable.
In the preprocessor some steps have been taken to further refine the specification of government debt, for instance the separation of externally-held debt from domestically-held debt and the differentiation of publicly guaranteed and not-guaranteed debt. Although these distinctions have not been brought into the forecasting side of IFs yet, and the need for them is not great, it merits comment on the preprocessor foundations.
With respect to firms, the preprocessor reads data from WDI on publicly guaranteed and not-guaranteed debt, both of which are assumed to be held by firms and which are summed to obtain total external firm debt (XFIRMDEBT). Holes are filled with zeros because levels of debt are often very small and non-reporting often will imply debt levels near zero. Because the data only cover stocks of debt held by developing countries as liabilities, the stocks as assets were once again allocated to developed countries, specifically to firms within them, according to GDP size.
With respect to government, not all of government debt is external. In fact, especially for developed countries, households and firms often hold much of it. In order to divide government debt between foreign and domestic holders of it, the preprocessor first computes government external debt. This is done by assuming that households do not have any real external debt, so that all external debt not assignable to firms is governmental external debt.
The assumption was again made that all of this debt should be assigned as assets to governments in developed countries. Rather than assigning it on the basis of GDP, however, it was assigned on the basis of official development assistance (ODA). The OECD and WDI both provide data on ODA. Because significant portions of ODA come as loans rather than grants, the assignment of the government asset offset of developing government debt based on the size of ODA makes sense.
Again, only in the preprocessor and not in the forecasting portion of the model, governmental domestic debt is calculated as total government debt minus the external stock.