Excerpt
Table of Contents
List of Figures
List of Abbreviations
List of Symbols
1. Introduction
2. Building the FSAM
2.1 Classification
2.2 Goods & Services
2.3 Production
2.4 Income Generation
2.5 Allocation of Primary Income
2.6 Secondary Distribution of Income
2.7 Use of Disposable Income
2.8 Capital Account and Gross fixed Capital Formation
2.9 Financial Flows and Rest of the World
3. Working with Real Data and Assumptions
4. An Alternative FSAM Presentation
5. A Computable General Equilibrium Model Application
5.1 Statement of Problem
5.2 Macroeconomic Assumptions
5.2.1 Sectors’ Behavior
5.2.2 Institutions’ Behavior
5.2.3 Definition of Equilibrium
5.3 Model Calibration
5.4 Original Equilibrium
5.5 Economic Experiment and New Equilibrium
5.6 Comparison of Equilibria
6. Résumé and Conclusions
7. Appendix
8. References
List of Figures
Figure 1: General Outline of the FSAM
Figure2: FSAM Account’s Classification Part 1/3
Figure 3: FSAM Account’s Classification Part 2/3
Figure 4: FSAM Account’s Classification Part 3/3
Figure 5: Goods and Services in the FSAM
Figure 6: Total Explanation of the FSAM
Figure 7: The Input-Output Matrix in Million Euros
Figure 8: The Alternative Input-Output Matrix in Million Euros
Figure 9: Seven Basic Steps to conduct a successful CGE Model Analysis Figure 10: Model Framework of Production and Distribution Figure 11: The whole Model Economy Flow of Funds Figure 12: Values of the Original Equilibrium and Results from the Experiments in Billion Euros
Figure AX1: Financial Social Accounting Matrix for Germany 2009 in 10s of Millions of Euros
Figure AX2: Alternative Design of a Financial Social Accounting Matrix for Germany 2009 in Billion Euros
Figure AX3: The complete CGE Model in GAMS
List of Abbreviations
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List of Symbols
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1. Introduction
In the light of recent economic crises the necessity of more detailed and especially financial investigations for economic policy makers and the majority of economic agents surged imperatively around the world. However, one quite popular analysis instrument used in many countries, unfortunately in Germany1 and some other members of the European Union seems to be lacking its deserved attention. Social Accounting Matrices (SAMs) and their respective Computable Equilibrium Models (CGEs) represent a useful tool for profound and targeted economic analysis worldwide.2
Basically, observed and selected data of a base year is accommodated into a matrix presentation taking into account the double-entry accounting principle of revenues and expenditures revealing cross-institutional and cross-sectorial information or the mix of both. The underlying principle is to connect the producing part of an economy with the national institutions and the rest of the world in order to be able to conduct a significant analysis through a Computable Equilibrium Model. This model is calibrated and computed to generate the general equilibrium of an economy with the help of (mostly neo-classical) economic equations and assumptions reproducing the same values as observed in reality. In consequence, it is possible to perform an economic experiment predicting the reactions of the economy under consideration when facing those exogenous shocks.
Until now, most SAMs and therefore CGEs have focused on a too limited presentation of the economies ignoring completely the financial part of it, even though this is an essential and in modern economies decisive part of economic life. This paper aims to transmit a step by step illustration of the elaboration of a Financial Social Accounting Matrix (FSAM) and the gradual development of an economic CGE model written in GAMS3 which makes use of the same data.
The second chapter of this paper explains the breakdown of my FSAM which is based on the recommendation of the Leadership group on Social Accounting Matrices by the European Commission (European Commission 2003) taking into account the classification and the circular flow of funds. In the third chapter, the way of filling in the theoretically explained FSAM with real data is shown and which aspects have to be taken into consideration. Chapter four in consequence presents briefly an alternative design for the FSAM paving the way for the model application in chapter five. This includes all steps from the intended economic analysis through the specification of economic equations and variables to the full CGE model in GAMS. The economic analysis of this model example will be about how the German Share Index DAX influences the institutional savings spending on either shares or deposits. Finally, chapter six closes with a brief résumé and a conclusion about the FSAMs, the conducted analysis and future research fields including FSAMs.
2. Building the FSAM
The construction of the Financial Social Accounting Matrix (FSAM)4 can be quite a time- consuming undertaking, because there is no global standard on its final design yet. There has been done a whole lot more research with applications of regular Social Accounting Matrices (SAMs) though5 which give lead to the construction of the FSAM. Just recently, a variety of economists have proposed different implementations and designs6. The main idea of the FSAM is to include the financial accounts of an economy to get a better impression of who is paying or receiving what kind of financial flow. Besides of having only the goods market the financial market is also included. As a consequence, there can be done a series of more detailed investigations giving rise to more sophisticated recommendations to economic policy makers. (MPRA 2009)
In the following I will explain the construction of a FSAM (Figure 1) step by step which is based on the recommendation of the Leadership group on Social Accounting Matrices by the European Commission. (European Commission 2003)
The advantage of this design is that it is conforming to the European System of Accounts 1995 (ESA95) and includes all major transfers of an economy. (Eurostat 2009)
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Figure 1: General Outline of the FSAM
Source: European Commission (2003)
This is not the only way to design a SAM or FSAM though. There is a plethora of possibilities and depending on the necessities, a SAM should be as simple and practical as possible. Therefore, later on, I will present an alternative design which is particularly suited to fit the specific GAMS model at the end of the paper.
In the FSAM there are eleven different accounts in each row and in each column. In addition, there is one more account in which the totals of each row and column are summed up. It is utterly important that the total of each row matches the total of its respective column to guarantee that an account does not spend more than it receives and that the circular flow of money is complete.
Before explaining every account in detail, it is important to consider that there is a classification for each of them. To understand the different accounts’ behavior in a better way, I will first say a few words about their classification.
2.1 Classification
Each of the eleven accounts, symmetrically in both, rows and columns, has its own subaccounts which constitute their classification. So actually the real FSAM will have all the accounts and sub-acconts as shown in Figure 2-4.
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Figure 2: FSAM Account’s Classification Part 1/3
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Source: European Commission (2003)
In this version of the FSAM I distinguish between Primary, Secondary, Tertiary and the Financial Sector.7 This classification corresponds to the “Production” account and represents the different sectors of the economy. The classification for the “Goods & Services” account would then be their corresponding products, so the goods or services produced by each sector (Figure 2).
Furthermore, the third account “Generation of Income” includes the factors of production, which are labor and capital. It also includes other taxes less other subsidies on production, paid by the production.
Regarding the institutions, covering accounts 4 to 7, there are Government, Households, NonFinancial Enterprises and Financial Enterprises (Figure 3). In my classification Households include “Non-Private Organizations Serving Households” (NPISH) which can be found separated in the Input-Output Tables.
Figure 3: FSAM Account’s Classification Part 2/3
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Source: European Commission (2003)
The “Gross fixed Capital Formation” (GFCF) account 8 in my FSAM has no extra classification, due to lack of information (Figure 4). So we just know how much GFCF each sector receives, but we do not know which sector pays which part of that amount. With additional information this account could be divided into the different sectors, revealing a little more detail. For our model purposes and for this FSAM exercise, a one dimensional vector is sufficient, though.
Finally, what is new to a regular SAM is the “Financial” account 9 (Figure 4), which is divided into its different financial assets: “Monetary, Gold & SDRs” (Special Drawing Rights), “Currency & Deposits”, “Security other than Shares”, “Loans”, “Shares & other Equity”, “Insurance Technical Reserves” and “Other Accounts receivable or payable”. This classification is conforming to the ESA95 and represents the financial investments of the institutions. (Eurostat 2009)
The account “Currency & Deposits” includes currency, transferable deposits, time deposits, savings deposits and savings certificates. “Security other than Shares” contains monetary market papers, bonds and financial derivatives. The “Shares & other Equity” besides of shares and other equity imply mutual funds shares and “Loans” counts short-term and longer-term loans. Equally, the “Insurance Technical Reserves” include short-term and longer-term claims. Finally, “Other Accounts receivable/payable” also implies claims from company pension commitments. (Bundesbank 2013)
Figure 4: FSAM Account’s Classification Part 3/3
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Source: European Commission (2003)
At last, the “Rest of the World” has two accounts 10 and 11, which are a current and a capital account to be able to distinguish between financial and regular spending.
Having in mind the accounts’ classification we can now fill Figure 1 with information of the circular flow of the economy. In the following I will explain what information the accounts hold and with which other accounts they interact. Meanwhile reading the accounts’ explanation, the completed FSAM can be read along in Appendix Figure AX1 at the end of this paper. Later on in chapter three, I will illustrate how to fill the FSAM with concrete numbers.
2.2 Goods & Services
Although the production process and the goods and services could be summarized and represented in one single account, they are separated into two different accounts here. The two accounts are differentiated, because in theory there could be an industry producing more than one of the goods that is represented in the “Goods & Services” account. For example, the 6 energy sector could produce wind, solar, atomic energy etc. Vice versa there could also be a commodity which is produced by various sectors: Transportation could be provided by a government sector and by a private sector or food products by small, medium and big agricultural enterprises.
The “Goods & Services” receive payments (row) from various other accounts which altogether constitute the final demand for domestic goods and services from the four sectors. This can also be seen in distributional terms and as an inverse flow: Where do the sectors commodities go to? The “Goods & Services” account itself makes some payments (column) to a variety of other accounts, which is its total supply. (Figure 5)
The “Production” account pays to the “Goods & Services” account for the intermediate products which are needed as input to conduct the production process (row: 1, column: 2). Furthermore, the institutions households and government spend their money on goods and services, which is their consumption (1,6). Another part which is paid for is the change in inventories (1,7) carried out mainly by the enterprises and investments are made in form of “Gross fixed Capital Formation” (1,8). Finally, a part of the goods and services are exported to the rest of the world (1,10).
Figure 5: Goods and Services in the FSAM
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Source: Own Construction and European Commission (2003)
Looking at the column of the “Goods and Services” account one can see where the supply of goods and services comes from: The domestic output comes from the production process (2,1) which is also the total of the production column, and another part is imported from the rest of the world (10,1). However, the government charges taxes for the commodities (and at times offers subsidies), so taxes minus subsidies on commodities are paid for by “Goods & Services” directly to the government (sub-account row 4.3, column 1, AX1).
The effect is that the column’s total is also valued in purchasers’ prices, as is the valuation of the row. This implies, though, that taxes minus subsidies on commodities also include the value added tax (VAT) and that consumption, etc. is also valued at purchaser’s prices. In my FSAM I separate the VAT to see who pays which part of VAT to the government, making row and column of the “Goods & Services” valued at producer’s prices.
2.3 Production
The “Production” account in consequence receives the payments made for all domestic output from the “Goods & Services” account (2,1) as indicated in Figure 6. To conduct the production process “Production” spends its funds on the consumption of intermediate products (1,2), value added to the product (3,2), which is the cost for the assumed factors labor and capital (this also includes other taxes minus subsidies on production) and finally, for the depreciation (8,2). Depreciation forms part of the gross fixed capital formation earlier received by the “Goods & Services” account.
2.4 Income Generation
Although this account could be a part of the next one (as it is in the national account), the generation of income has its own account to connect the producers’ realm with the different institutions’ behavior through the factors of production. At the same time it connects the input-output table (IOT) of an economy with the national account. If it was not for this separation, one would just know that the sectors pay so much to the institutions, but not through which factor of production, which is a core piece of almost every macroeconomic model.
Therefore, the account of the factors receives payments from domestic industries (3,2), but also from foreign industries (3,10), which is the income inflow. Subsequently, “Income Generation” passes on these funds to domestic institutions (4,3) and also to non-residents (10,3), which is the income outflow. As shown in Table AX1, only households and part of the rest of the world receive all labor payments, whereas capital is distributed between all institutions. “Other Taxes minus Subsidies on Production” is “received” by the national government, of course, but the rest of the world also benefits from it (10,3.3,AX1).
Figure 6: Total Explanation of the FSAM
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Source: Own Construction and European Commission (2003)
2.5 Allocation of Primary Income
The allocation of primary income represents in consequence the inter-institutional transfers of property income which sums interests, dividends, rents, etc. (4,4). This includes tranfers from and to the rest of the world (4,10 and 10,4). In my version of the FSAM, as mentioned earlier, taxes on products are split into taxes on products paid by the sectors (4.3,1,AX1) and taxes on products paid by the consumers households and government (4.3,6,AX1), gross fixed capital formation (4.3,8,AX1) and the rest of the world (4.3, 10,AX1). This seperation makes it possible to see a little clearer who is paying which part to the government. Alternatively, all taxes on products can be accumulated in (4.3,1,AX1) having the consumption at purchaser prices, as is the case in the FSAM of the European Commission (European Commission 2003). Further on, the resting funds of this account of the institutions represent the net national income (5,4) and are taken to the next account.
2.6 Secondary Distribution of Income
Furthermore, “Secondary Distribution of Income” indicates the redistribution of the primary income within the national institutions (5,5,Figure 6). These redistributions are taxes on income, wealth, etc., social contributions and benefits (except of those in kind) and other current transfers. Flows of that type from and to the rest of the world are also taken into account here (5,10 and 10,5). The remaining funds are taken to the next account again and they are called disposable income (6,5).
2.7 Use of Disposable Income
Government and households use their disposable income for consumption (1,6), whereas the taxes on products of that consumption are counted in (4.3,6) in my FSAM. Part of household consumption takes also place in the rest of the world, meanwhile foreigners spend money on consumption in Germany. The difference is counted in (10,6) and represents together with domestic consumption and their taxes the total household consumption as it is listed in the national account.
Cell (6,6) then expresses the adjustment for the change in net equity of households in pension funds which theoretically could also be received from or paid to the rest of the world (6,10 and 10,6). In our particular case, though, they are equal to zero, so in Figure 6 they are not mentioned. Saving of all institutions is expressed in (7,6) and represents the resting funds which are taken to the next, the capital account.
2.8 Capital Account and Gross fixed Capital Formation
In consequence, the capital account of the institutions receive payments from their own savings of the disposable income (7,6) and also from their net incurrence of liabilities of the financial account (7,9). Theoretically, capital transfers of acquisitions less disposals of non- produced non-financial assets could be counted in (7,7), but are left in blank because ignored here due to irrelevancy though. In addition, capital transfers could also be received from or paid to the rest of the world (7,11 and 11,7), but because of missing data, they are not filled in my FSAM.
Payments of the capital account are made for the change in inventories of which the majority is paid by the non-financial enterprises (1,7). Another part of the capital account is used as financial investments and is shown in (9,7) as the net acquisition of financial assets which include a variety of financial instruments. Furthermore, the institutions pay new investments which are needed by the production (8,7). These new investments, together with the depreciation paid by the production itself (8,2), is then transferred as “Gross fixed Capital Formation” to the “Goods and Services” account, so that the industries receive and use these payments (1,8). If there was more detailed information available, here we could see what different product groups each sector needs for its investments. Product taxes on gross fixed capital formation are listed in (4.3,8,AX1).
2.9 Financial Flows and Rest of the World
The “Financial” account receives payments for net acquisitions of financial assets from national institutions (9,7) and from the rest of the world as net lending or borrowing which is shown in (9,11). In addition, payments are made to the capital account of the institutions as the net incurrence of liabilities (7,9).
Finally, the external balance is described in (11,10) and is seen from the viewpoint of the rest of world. So a negative sign reflects a positive current external balance for the economy under consideration. Furthermore, the external balance is a balancing item, like there are many others which I have not pointed out yet. I will discuss the function of the balancing items and the transition from real data to the complete FSAM in the next chapter.
3. Working with real Data and Assumptions
After having understood the different positions of the FSAM its construction can be completed by filling it with data of the real economy (Figure AX1). The main data source I used is Destatis, which is the Federal Statistics Bureau of Germany.
The first step is to choose a base year which will be represented in the FSAM and later on in the model, too. I chose 2009 as base year as this was the year with the newest data publications necessary available. In addition, it will be interesting to conduct an economic analysis in the light of the financial and world crisis which started in 2007.
Second, there needs to be gathered all information necessary to fill in the FSAM. The best source is traditionally the official statistics bureau of the observed economy. For Germany this is Destatis. Alternatively, Eurostat or the OECD database could also be used. In addition, to fill in the data for the financial account, data from the (German) Central Bank or the European Central Bank is needed. The following files are essential:
Input-output table (IOT) of the domestic production with imports (Destatis 2013a) National account including sector accounts (preferrably conforming to ESA95) (Destatis 2013b)
Financial accounts (Bundesbank 2013)
When obtaining the data it is upmost import that all data sets do not only refer to the same base year, but also have the same publishing date, if procurable. If not obtainable, the numbers might differ and then the totals of the FSAM will not match anymore and the complete analysis could be distorted. For example, the national accounts of a specific year might be updated on a regular basis, maybe every year, but the IOT might only be published once and might not be updated anymore or only once in a while. Therefore, before doing the whole exercise one should be aware of the publishing date and making sure that key numbers like the total of value added, intermediate consumption, final consumption, etc. concur.8
Third, before filling the FSAM and to make sure that the circular flow of production is complete and to eradicate errors early, one should do a pre-exercise filling out an input-output matrix (IOM) like the one in Figure 7. One needs to decide which sectors of the economy of the IOT ought to be subject of the observation and all the other sectors should be put in an additional sector. I will observe the primary, secondary, tertiary and the financial sector. So after dividing all sectors into those four, I summarize the IOT putting the sums of the four sectors’ key figures into the IOM. In order to do that, one needs to know how much each sector is paying to every other sector as intermediate consumption which is put in the first part of the IOM. Vertically, this is the intermediate consumption and horizontally, this is the intermediate demand.
Going down the IOM, the sector totals of the compensation of employees and net operation surplus is put there as “labor” and “capital”. Then the sector values for the depreciation, other taxes minus other subsidies on production and taxes minus subsidies on products is recorded there. Those three could alternatively be put in a single account which I have not done, because the FSAM requires to put all of those values in different spaces. As I have mentioned earlier, the FSAM (and therefore also the IOM) can also have a lighter and more summarized design, depending on one’s necessities. An example for a slightly condensed IOM can be found in the next chapter (Figure 8). The fields of “Intermediate Consumption”, “Value Added” and the gross value of production “GVP” are calculated automatically and the sum of all sectors should coincide with the total of all sectors in the IOT.
Figure 7: The Input-Output Matrix in Million Euros
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Source: Own Construction and Destatis (2013a)
Going horizontally, there is the total demand for each sector. So after the intermediate demand is calculated automatically, there is the consumption of the households (C) and the government (G), the change in inventories (ChINV), gross fixed capital formation (GFCF), exports (Exp) and imports (Imp). In consequence, the final demand (FD) calculated by excel is the sum of all those, except of the intermediate demand, minus imports. At the end, to get to the GVP the intermediate demand is added to the final demand. The GVP of each row and also their joined total have to coincide with the GVP of each column and also their joined total. If that is not the case a mistake was made in transfering the data from the IOT to the IOM. To detect a potential error one can check the sum of all (four) sectors of each variable
[...]
1 Actually, the only recently officially published SAM for Germany was published in 2004 for the year 2000 and was a onetime affair. (Schwarz et. al, 2004)
2 To mention just a few, famous examples include the analysis of household behavior in the Norwegian MSG-6 Model (Bye and Holmoy, 1997), the evaluation of the impacts on Mexico after joining the NAFTA (Pérez, 2005) and the GTAP Project (Hertel, 1997) where research is conducted on a variety of topics. Alternatively, any work of Thomas F. Rutherford.
3 GAMS stands for General Algebraic Modeling System which was developed by researchers at the World Bank for the exact purpose of conducting complex and large scale model applications. See also Rutherford (1998).
4 The Leadership group on Social Accounting Matrices refers to this design as to a “Detailed National Accounts Matrix”. (European Commission, 2003)
5 For examples see Thiele and Piazolo (2002), Shantong et al. (2004) or Keuning and Rujiter (1988).
6 For examples see HUBIC (2012), MPRA (2009), Hernández (2008) and ECB (2004).
7 The Matrix of the EC’s Leadership group has a different classification: There are six different sectors and products. In addition, in the income generation account they counts “net mixed income” separately and differentiate between the institutions “households” and “non-profit institutions serving households”, which are joined together here. Throughout the paper I will point out all differences to the Leadership group’s Matrix. For further details see European Commission (2003).
8 Destatis actually sent me the accurate data on personal inquiry.