Commentary
About the data
Definitions
Data sources
Increasing macroeconomic stability
For markets to function well, governments, businesses, and financial institutions need timely, accurate information on the macroeconomic and financial condition of a country. Improvements in the current account and in fiscal deficits are often viewed as signs of a strengthening economy. Lenders monitor a country's creditworthiness by watching trends in the level of reserves and in external debt ratios. Investors look at investment levels and money supply and exchange rate trends to assess the prospects for growth and financial stability. Portfolio managers, who frequently move large volumes of funds from one country to another in a search for high rates of return, look very closely at changes in key macroeconomic indicators in making decisions. And because the size and volatility of these movements in foreign capital can be destabilizing, governments have increasingly used macroeconomic indicators as a tool of economic management.
In the short to medium term there are five key elements in macroeconomic stability: low and predictable inflation, appropriate real interest rates, stable and sustainable fiscal policy, an exchange rate that is not perceived to be over- or undervalued, and a viable balance of payments (see Fischer and Easterly 1990; and Fischer 1993). The two most susceptible to policy control are the inflation rate and the government's fiscal deficit. Uncertainty about either of these indicators tends to slow private investment and thus productivity growth. And inflation distorts price signals, leading to poor decisionmaking and costly efforts to hedge against the loss of monetary assets.
No single indicator by itself or in comparison to the value for another country is fully diagnostic. For example, a high level of debt may reflect the confidence of investors in the economy's future prospects. A large current account deficit may stem from high levels of private investment. And high inflation or a large fiscal deficit can occur despite good policies-the result of a supply-side shock caused by a poor harvest or deteriorating terms of trade.
The table shows three-year averages for key macroeconomic variables in the most recent period for which data are available. Most of the indicators appear elsewhere in this book. Readers may wish to consult the notes to tables 4.12, 4.16, 4.17, 4.20–4.22, 4.24, and 5.5 for further discussion of the sources and reliability of the data.
Seignorage, which does not appear elsewhere in this book, is the net revenue derived by the government or monetary authorities through the issuance of money. In the past seignorage was measured as the difference between the face value of money and the value of the metals it was made from. Now that money is printed, the cost of its production can be ignored. Seignorage is therefore measured by the change in holdings of reserve or base money, which in most countries is equal to the non-interest-bearing liabilities of the central bank.
Definitions
• Current account balance is the sum of net trade (exports minus imports) in goods, services, and income plus net current transfers.
• Gross domestic savings are the difference between GDP and total consumption.
• Gross domestic investment is the sum of all outlays on additions to capital assets, plus changes in inventories.
• Overall fiscal deficit is the overall budget deficit of the central government, calculated as current and capital revenue and official grants received, less total expenditure and lending minus repayments.
• External debt (present value) is the discounted present value of future debt service payments, including private, public, and publicly guaranteed short- and long-term debt. The discount rate reflects market lending rates for the currency in which the loan is denominated.
• GDP deflator is the price index that measures the change in the price level of GDP relative to real output.
• Seignorage is the annual change in holdings of reserve money (IFS line 14).
• Money and quasi money refer to the M2 definition of money supply (IFS line 34 and 35).
• Real effective exchange rate is a trade-weighted index of a country's real exchange rates. An increase represents an appreciation of the currency.
• Real interest rate is the deposit interest rate (IFS line 60l) adjusted for the rate of inflation as measured by the GDP deflator.
• Gross international reserves comprise holdings of monetary gold, special drawing rights (SDRs), the reserve position of members in the International Monetary Fund (IMF), and holdings of foreign exchange under the control of monetary authorities, expressed in terms of the number of months of imports of goods and services they could pay for.
The indicators in the table come from the World Bank's national accounts data files and the IMF's International Financial Statistics and Government Finance Statistics.