## 3.3 **The Central** T **ank**

The Central Bazik budget holds for flows over any discrete period of time. For a Central Bank, no less than for any other economic unit, the difference between the flow of receipts and the flow of expenditures over some time period--that is, "saving", or the current "budget surplus", or the "change in net worth"--is necessarily equal to the sum of changes in assets less the sum of changes in liabilities. Table A.2 shows the current and capital account flows assumed for the Central Bank.

Current revenues of the Central Bank include interest receipts on its net domestic credit to the government, private and commercial banks credit, and interest on foreign reserves. Its current revenues finance the Central Bank's operating cost, interest payments on the Central Bank's foreign debt, transfers to the government in the form of profits, and savings, or change in net worth. The operating costs, also include net other assets (buildings, real state, etc).. Notice that the change it ral Bank's net worth are identical to the difference between the Central Bank's revenues and expenr s, but excluding capital gains or losses due to exchange rate devaluations.

In the capital account, the change in net worth, along with the net iss je . foreign debt, the net increase in the monetary base (currency in circulation and reserve requirements), ;ar il gains/losses (the so called accounting flows), and the deposit balance of the government, finance the acqu'i.tion of foreign reserves and domestic credit creation. Net disbursements include both short- and long-term net disbursements, as well as changes in arrears, which we consider as a financing item.

If we define the Central Bank deficit as the negative of the change in net worth, as defined here, then there is full consistency of treatment between the deficit of the Government and the Central Bank losses. In the case of the Government, the public sector deficit was intended to measure the financing needs rather than economic results. Consistency was achieved by adjusting the Central Bank's results for what is necessary to become a measure of financing needs. As in the case of the Government, amortization payments are included in net disbursements, and hence excluded from the deficit, even though they have to be financed.

It is useful to obtain an independent estimate of the size of the- accounting gains or losses. In principle, the accounting flows of the central bank should capture only the accrued capital gains or losses arising from converting stocks of assets and liabilities denominated in a foreign currency to local currencv. Accounting flows may be considered either an asset or a liability, the sign of which will depend on the value of net foreign assets. If the accounting flow is considered a liability, and if net foreign assets oi the central bank are positive, an exchange rate depreciation should generate an increase in the domestic currency value of net foreign assets, and a matching increase in the accounting flows. Conversely, if the net foreign assets are negative, an exchange rate devaluation implies a decrease in the accounting flows. Thus, a devaluation should not have an immcdiate impact on base money creation.

# 3.4 Analysis **Banks**

This component of the monetary system represents the financial institution, or group of them, that will be the focus of our analysis. In particular, we want to be able to make an assessment related to the performance and viability of Analysis Banks (AB). Later, when we describe an application of the model, this sector will represent the. activities of the _Banco de la Repaiblica,_ the largest public bank in 13