Internal consistency is forced on the system by the fact that what is a use (asset!) for one agent, must be a source (liability) for another. Btcause of this, if the incomes of a sector change during an accounting period, not only that sector's expenditures or its overall position will change, but other sectors will also show corresponding changes. Furthermore, a change in the position of a sector--surplus or deficit--is related to changes in the amount and possibly in the composition of financial assets or liabilities held by the sector. Corresponding adjustments can be found in other sectors. Similarly, a linkage within the sector or between sectors can be trac2d if a change originates in the holding of a certain financial instrunment in a sector.

For example, in Table I an ir.crease in -ivernment investr t may be financed by an increase in net borrowing from the bankir sector, which may decrea.% ihe availability of bank loans to business firms, given the total amount of credit of the banking sector. T'his decrease may in turn lead to a decrease in private investment. It is important to recognize that the FOF system itself does not indicate the cause and effect of these adjustments. However, behavioral hypotheses can be investigated within the framework of this accounting system, Lnd different adjustment patterns have different implication, for policies. Except for the monetary system, our behavioral assumptions are the sarne as in the '.MSMX, and are presented in Appendix C. We, nevertheless, discuss later the concept of closure. That is, how is it that we may hr,ng about the equality between supply and demand. Different closure assumptions will have different policy and behavioral implications.

The interiocking nature of the FOF gives rise to a problem of identifying which sector is associated with a particular flow. To identify whether a particular item is a use or a source for certain sector, the user must remember that every sector's disaggiegation is based on factor ownership and sector behavior. In our example, direct taxes are a use for the Private Sector, and a source for the Public Sector. In the current matrix in Table 1, the placement of direct taxes in the column (uses) for the Private Sector and the row (sources) for the Public Sector reflects this relationship.

The case of the Monetary Sector, however, requires more discussion, specially since we use a very detailed balance sheet for the _A_ nalysis Banks. To start with, not all assets (liabilities) in the balance sheet represent imnmediate uses (sources) for another agent. For example, items like depreciation and loan provisions, while mnportant in balance sheet accounting, should not enter in the FOF for the simple reason that nobody is really receiving or paying them. (nevertheless, one may assume that the sector is paying those flows to 'itself.') The same applies to accounting items. When dealing with assets and liabilities expressed in local currency which were originally denominated in foreign currency, valuation adjustments have to be made in order to maintain the consistency between stocks and flows. For exarnple, at the time of a devaluation, the local currency value of net foreign assets automatically increases. The balance sheet should reflect such an increase, although there is not an actual disbursement until the flows are realized. Also, one has to be careful in identifying the right asset or liability holder. For example, we should not identify the Foreign Sector as the holder of all dollar claims. In the next sub-section we cover these issues in more detail.

Double-entry is also important since it forces reconciliation of the accounting practices of different agents. The two accounting approaches generally used to record transaction flows are the cash basis and the accruals basis. For example, balance of payments, national accounts and monetary statistics are normally recorded on an accruals basis, where transactions are recorded when an obligation or a liability arises, not when it is actually paid. For the monetary sector, the difference between cash and accruals basis is not significant because most bank transactions are conducted in cash. On the other hand, government finance statistics are often presented on a cash basis and the underlying budgetary accounts 7