metadata: authors: 0: author: Ramangkura, Virabongse
1: author: Nidhiprabha, Bhanupongse
count: Thailand
docna: 0: docna: The macroeconomic effects of the public
            sector deficit : the case of Thailand
docty: Policy Research Working Paper
subtopic: Public Sector Economics,Banks & Banking Reform,International Trade and Trade Rules,Inflation,Macroeconomic Management,Public Financial Management,Public Finance Decentralization and
            Poverty Reduction
teratopic: Public Sector Development
abstracts: cdata!: In the past, the Thai government usually
            ran a budget deficit.  In recent years, the deficit has
            become a surplus.  A continued high growth rate in the last
            three years produced an unexpected rise in tax revenues, and
            the growth of public spending was effectively controlled.
            The government has adopted an early retirement plan for
            foreign debts and in fiscal 1991, for the first time in
            recent history, the government proposes to balance the
            budget.  The central government's actual spending is
            usually below planned spending - which is overestimated
            during slumps and underestimated during booms.  Tax capacity
            has increased gradually over time relative to GDP.  This
            factor has contributed most to reducing the public deficit.
            There have also been more automatic stabilizers and a
            decline in dependence on foreign trade tax.  Thailand's
            pattern of deficit finance has contributed to macroeconomic
            stability.  In times of high deficit, the government relies
            less on borrowing from the central bank and more on
            borrowing from commercial banks and the private sector.
            Money-financed deficits are more likely to exacerbate
            inflation and the current account deficit than any other
            method of deficit financing.  The strong growth of the Thai
            economy is attributable partly to appropriate fiscal
            responses to external shocks.  Stable prices helped
            facilitate the depreciation of the real effective exchange
            rate, further strengthening export and output growth.
geo_reg_key: 517198,517191
repnme: repnme: The macroeconomic effects of the public
            sector deficit : the case of Thailand
display_title: The macroeconomic effects of the
            public sector deficit : the case of Thailand
listing_relative_url: /research/1991/03/700046/macroeconomic-effects-public-sector-deficit-case-thailand
topicv3: Commercial Banking m1326069 1236,Current Account m1326278 1135,Public Finance Management m1326316 716,Inflation m1326709 0870F4727ACED1CF8525815C00471347,Trade m1326924 698
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Public Sector Development
origu: Policy, Research & Ect Affairs
no_of_pages: 78
model_extractions: **Policy, Research, and External Affairs**

**Macroeconomic Adjustment and Growth**

WPS 633 This paper - a product ol tlhe Macroeconomic Adjustment and Girowth Division, Country Econiomics Department - is part of a PRE researcli project, Thc Macroecon-omioics ol hlic Public Sector Delicit (RPO 675-31). Copies are available free from the World Bank, 1818 H Street NW, Washington DC 2()433. Please contact Raquel Luz, room NI 1-057. extension 34303 (73 pages).

In the past, the Thai governmenl usuaUly ranz a budget deficit. In recent years, the delicit **has** become a surplus. A continued high growilt rate in the last three years produced an unexpected rise in tax revei.ues, **aO** the growtth ol public spending was elThcfive., controlle(l. The govemment has adopted an early retiremen1t plan for foreigin debts anid in liscal 1991, lor **ihe** lirst time in recent history, the governmnlt proposes to balance the budget.

The central governmcint's actual spendling is usuaIll below planied spending - which is overestimated during slumps and underestimated during booms. Tax capacity has increasedl gradually over time relative to GDIP. This flactor has conlributed most to reducing thc public deficit. Thlere have also been more automlzalic stabilizers and a decline in dependence on Foreign trade tax.

Thailand's pattem of deficit finance has conitributed to macroeconomic stability. In times of high deficit, tile government relies less on borTowing Iromii the central bank and more on borrowing from colmmercial banks and the private sector. Money-linanced delicits are more likely to exacerbate inflation and the current accounlt delicit tlhain any other method of deficit linancing. Thc strong giowth of the Thali economy is attributable partly to appropriate fiscal responses to extenial shocks. Stable prices helped facilitate Ithe depreciation of llie real effective exchange rate, furlher strengtheninig export and output growilt.

**The PRIE** Working **Paper Setrie disemi n ailes** thet fin did g ol **%ol** tinder **Tk %;t% in lhe** 1B an ks **Poh c\** . **ReaCr`Ch. and** Etcrnal Affairs Copipiex. An objectis eof tlhe series **i s** to gtts t indinJ0 oht en if paresetations ;;rc Icss thanFut ;dishlcd. I'e `uickly, The Finidings. inlerpretatlons., ;ld coneh **Ins iion** In Ir hesre (lop tnotnecssarilx rcpresetIl otic i; at1Hank **_1d 1s_** p)olic\ **Pi''..i:-.d tM** . I''RI i)-':nui,mina;uo (Coi:ter
# The Macroeconomics of the Public Sector Deficit: The Case of Thailand

by Virabongsa Ramangkura and Bhanupongse Nidhiprabha

# **Table of Contents**

|1.|Introduction|1|
|---|---|---|
|2.|Historical Background|1|
||2.1<br>The Macroeconomic Performance of the Thai Economy<br>2.2<br>Fiscal Structure<br>2.3<br>Regulations on Public Deficit|1<br>2<br>4|
|3.|Decomposition of the Public Deficit|5|
|4.|Implication of Domestic Financing the Deficit|7|
|5.|Effects of Public Deficit on Private Investment<br>and Consumption|8|
|6.|Impacts of Public Deficit on Real Exchange Rate and Trade<br>Deficit|9|
|7.|A Macroeconomic Model and Estimation Results|10|
|8.|Implication of Public Deficit|19|
||8.1<br>Historical Simulation<br>8.2<br>Counterfactual Simulation of the Effects of Public<br>Deficit|20<br>20|
|9.|Conclusion|**22**|
|Refer|ences|24|
|Figu|res|**26**|
|Table|s|40|
|Appe|ndices|55|
The Macroeconomics of the Public Sector Deficit: the case of Thailand

# 1. IN- oDUCTION

This, paper examines the causes and the oonsequences<sup>of Thailand's</sup> public deficit. The changing structure of<sup>public expenditures</sup> anrd public revenues will be presented. In the past, the Thai V(1%ernment usually ran a<sup>budget deficit.</sup> However, the public 1iflfit turned into a surplus in recent years. In the 1991 fiscal year, the government has proposed a balanced budget<sup>for</sup> the first time. We would explore the reason<sup>for the turnaround</sup> of the fiscal position of the<sup>Thai government.</sup> The focus will be made on the consequences of public deficit on macroeconomic variables.

The organization of the paper<sup>is as follows.</sup> Section 2 provides the historical background of the macroeconomic performances of the Thai economy. The structure and the characteristics of public deficit of the Thai<sup>government will be examined, together</sup> with the institutional background<sup>on law and regulations on the</sup> size of public deficit and external debt. In section 3, decomposition of the public sector deficit is presented to evaluate the sensitivity<sup>of the deficit with respect to external</sup> factors, domestic macro variables,<sup>and policy variables. Section</sup> 4 explores the implications of domestic financing of the deficit, in particular the inflationary effects of money financing budget deficit. Section 5 contains the results<sup>from</sup> partial equilibrium analysis<sup>of the direct and indirect effects</sup> of public deficit on investment and consumption. Section 6 identifies the impact of public<sup>deficit on real exchange rate and</sup> trade deficit. Section 7 discusses the specification and the estimation results of the macroeconometric model that will be used to examine the consequences of the budget deficit. Counterfactual simulations of various methods<sup>of financing</sup> the deficit are conducted in<sup>Section 8.</sup> The concluding observations on the implication of the<sup>deficit, its structure and its method</sup> of financing on macroeconomic variables are made in the last section of the paper. The appendix contains the list of variables and the estimation<sup>results of the model.</sup>

# 2. HISTORICAL BACKGROUND

# 2.1 The **Macroeconomic Performance**<sup>**of the Thai economy**</sup>

The Thai economy continued<sup>to grow rapidly between 1971 and 1989</sup> as result of the expansion in domestic investment and<sup>exports.</sup> The real GDP growth rate<sup>averaged 7.1 percent during this period.</sup> As can be seen from Figure<sup>1, the real growth rate was always</sup> positive even during the periods of external shocks. The positive shock in 1973, due<sup>to commodity</sup> export boom, led ".o higher growth and inflation<sup>rates.</sup> The negative shocks in 1974 1
and 1980 led to lower growth and higher inflation rates. The internal shock--the military coup--in 1981 further aggravated the grow'- performance in 1982 Aside from those years affected by the shocks, the Thai economy remained buoyant with a high degree of price stability. The average inflation rate throughout the period was 7.2 percent. If the external shocks in 1973, 1974, and 1980 were excluded, inflation averaged only 4.9 percent. It should be noted that inflation rate in Thailand is a one-shot inflation type, rather than spiral inflation. The price level rose rapidly as the result of the shocks and remained rather stable in subsequent period. After 1975 and 1982, the economy was able to expand at a faster rate than the inflation rate, thus regaining the pre-shock growth path within a few years after the shocks. From 1981 to 1984, the inflation rate was on a declining trend, while output also expanded at a positive rate. Since 1985, the inflation rate has resumed its momentum, output aeso expanded rapidly.

The rapid growth must be supported by domestic and foreign savings. The investment-saving gap became wider as can be seen from figure 2, illustrating a reflection of the investment gap in terms of the trade deficit as percentage of GDP. The trade balance was always in deficit. Thanks to foreign capital inflows, the balance of payments was in surplus after 1984, resulting in the rapidly expanding foreign international reserves in recent years. Nevertheless, the deficit in the balance of payments occurred in 1978 and 1983. This was the period which required some adjustments in macroeconomic policies. We are now asking an important question: To what extent fiscal policy, or public deficit in particular, contribute to the successful performance of the Thai economy?

# 2.2 Fiscal Structure

The deficit of the consolidated public sector was larger than the central government deficit, due to the deficit budget of public enterprises. Nevertheless, the movement of the consolidated deficits was determined mainly by the deficit in the central government budget. Except in 1974, 1988, and 1989 when surplus in central government balance occurred, the budget was usually in deficit. The highest level reached 8.6 percent of GDP in 1985, the year in which the growth rate fell to 3.5 percent. Considerable efforts were made to lower the size of the deficit after 1985. As shown in Figure 3, the relative size of the public sector in GDP was reduced remarkably from 23 percent in 1985 to 16.6 percent in 1988. During the corresponding period, the revenue as a percentage of GDP was enhanced from 14.6 to 16.8 percent. Consequently, the public sector deficit was converted into surplus in 1988.

Table I indicates the changing structure of public expenditures from 1970 to 1989. The slowdown in the growth rate or public 2
expenditure in the period 1986-89 was the result of the reduction in spending growth rates of both current a capital txpenditures. Since _the_ cut was made more from capital e\penditure, its share in total expenditure was reduced. Fiscal 5perl(iinlg struc-ture was altered by reducing public capita' accmllat ionr. This implies that the role of public sector as pro\ niing infrastrueture to accommodate private investment will he diminished. Since the share of expenditure on infrastructure in total public expenditure is low, averaging 21 percent during 1975-1985, the effect ca private investment of reducing the size of public sector is favorable by reducing crowding-out effect. reducing . In some countries, it was very difficult to cut down public investment and this was a source of run-away budget deficit in many LDCs during external shocks (Tanzi, 1986). The variation of public expenditures suggests the flexibility of the discretionary fiscal policy. The government was able to slow down or speed up the growth of public expenditures, thereby exerting some control over the size of the deficit.

In terms of major functional classification, the slowdown in central government expenditure growth was achieved through reducing the share of budget allocated for economic services. The growth rate of defense spending was cut considerably from 18 percent in the period 1975-85 to only 2.7 percent in the period 1986-89.

Figure 4 presents the consolidated non-financial public sector expenditure as percentage of GDP. The interest payments rose from 0.26 percent in 1970 to the highest level of 1.9 percent in 1986. The expenditure on wages remained relatively stable around 5.72 percent of GDP, while expenditures on fixed investment and goods and services averaged 7.1 and 4.6 percent, respectively On the revenue side of the central government, as reported Table 2, the share of income tax revenues **iti** total taxation has increased from 13.5 percent in tie period 1971-74 to 21.6 percent in the period 1986-89. During the same corresponding pe,iod, the share of sales taxes rose from 19.6 to 27.5 percent, while the importance of import duties has diminished over time. Its share reduced from 27.7 percent to 22.4 percent. The growth rate of different components of tax revenue in Table 2 also suggests that indirect tax revenue might be responsive to rapid economic growth experienced in the period 1986-89.

The government revenues as a proportion of the GDP increased gradually over the last two decades, from 13.1 percent in 1970 to 15.3 percent in 1989. Figure 5 illustrates the tax revenue structure as percent of GDP.

The values of expenditure elasticities and tax buoyancy are provided in Table 3. The elasticities of public expenditures are obtained fron. regression equations explaining public expenditures by the one-period lagged public revenues and the previous period public expenditures. The figures in parentheses indicate the long run elasticities. It is found that both short-run public 3
consumption and investment elasticities are less than unity, suggesting that public expenditures were constrained by public revenues. The long-run Nalue of the elasticity of total public expenditures was cloae to unity, indicating the stationary level of tie defit t in the long run.

The values of tax buoyancy were obtained from the regression eoefficients derived from regressing various tax revenues on tax bases indicated in Table 3. It is found that, except for import duties, both direct and indirect tax buoyancy are elastic with respect to personal income and domestic absorption, respectively. It. xuggests an important role played by the fiscal bu t-in stabilizers. As implied by the values of the tax buoyancy Table 3, the revenues from income and business taxes became increasingly important, as shown by their rising shares in GDP in Figure 5.

# 2.3 Regulations on public deficit

The government planned to reduce the size of the deficit (as measured by a percentage of the revenue) since 1978. The General Prem government determined to strictly maintain the conservative fiscal policy, trying to control the size ot the deficit. The government had a tendency to overestimate public expenditures. The actual amount of public spending was usually lower than the planned level. On the other hand, the revenue was underestimated during the economic toom period, while it was overestimated during the economic slump. As a result, as shown in Figure 6, the actual level of public deficit was smaller (larger) than the intended level of deficit under the economic expansion (slowdown). Thus, given the level of public expenditure, the actual size of the deficit was altered P.s a stabilizing .iscal measure.

# Budgetary Law

The budgetary law in 1959 stipulated the deficit must not exceed 20 percent of the government expenditure. In 1974, the budgetary law was relaxed to accommodate the expenditure on principal repayments. According to the revised budgetary law, the size of the deficit must not exceed 20 percent of the proposed level of public expenditures plus 80 percent of the proposed budget allocated to principal repayments. As a result, the size of the deficit itself is constrained by the size of the public revenue.

The implication of the budgetary law is that the level of the preposed spending cannot exceed 25 percent of the level of estimated revenue (G-R <.2*G, or G < 1.25*R). This rule has a fundamental effect on the ability to control the size of the deficit Table 4 elucidates this point. The estimated or the propose±d expenditure (Ge) were usually less than the actual spending (Ga). On the other hand, the estimated revenue (Re) was either higher or lower than the actual revenue, depending on the
# accuracy of the forecasts on economic activity.

The pLanned le'%e1 of public expenditure as percentage of the maximum level permitted bv budgetary law declined sharply after 1977. During the Prem regime, the planned level of public expenditure was on average 90 percent of the maximum permitted level. After the hludgetary law was revised in 1974, the ceiling on the deficit bec.ame a binding (-nstraint on the level of proposed spending. As indicated in She last column of Table 4, the actual level of public expend.tures was well below the maximum level permitted by the budgetary law. Although the pericd 1975-1935 was during the time when the government accelerated the public spending, the increased spending never exceeded the limit, ranging from 84 to 98 percent of the maximum amount.

# Debt-service ratio and foreign debt ceiling

Regulation on foreign borrowing was made in 1960 by setting the ceiling oni debt-service ratio at 5 percent. In addition, foreign debt services must be less than 13 percent of planned revenue. The f3reign debt policy commission was alsc set up in 1960 to monitor and regulate foreign borrowing. The debt-service ratio and foreign debt service to planned revenue ratio were revised upward gradually in subsequent years to allow the government to finance its capital expenditure. In 1977, foreign debt policy commission was empowered to control public enterprises' foreign borrowing. In 1981, the ministry of finance was empowered to negotiate foreign loans for military procurement. The debtservice ratio was raised temporarily from 9 to 11 percent for the period 1984-1987 to accommodate refinancing program. The actual value of public debt service ratio as compared with the ceiling was presented in Figure 7. The debt service ratio declined after 1985 when the government realized the heavy burden of external debt. In 1986, the government was de -mined to reduce foreign debt by setting a one billion LIS dollars maximum amount of foreign borrowing within one year. This maximum amount was later raised to 1.2 billion US dollars in 1989.

# 3. DECOMPOSITION OF THE PUBLIC DEFICIT

An analvsis of the effects of public deficit on domestic macro variables will be discussed in subsequent sections by employing a small macroeconometric model. Since the size of the public deficit is in turn affected by the changing macroeconomic variables, from the partial equilibrium analysis, it is possible to identity some of the feedback effects of the domestic macro variable by using a single regression equation. In this section, the size of the consolidated public deficit wll be decomposed into domestic macro variables, foreign variables, and policy variables.

The contributions to the deficit of various variables will be 5
measured by their statistical significance in the regression equation which explains the deviation of consolidated public sector deficit from the value in the b,ase period. The regressors in the equation are also in the forr of the deviation from their base values. For domestic variables, we include the domestic interest rate, real exchange rate, inflation rate. The terms of trade and the foreign interest rate are chosen. Taxation rate, fiscal structure variable, or the ratio of public investment to public consumption are employed. Some variables are omitted due to multicollinearity. The best result is presented in Regression 1.

The result indicates that the terms of trade (PXM), and the tax ratio (TY) have a significant negative impact on the size of the deficit, while inflation rate (INF) has a positive impact. The real exchange rate variable (PTN) is not statistically significant. An improvement in the terms of trade would stimulate the economy and indirectly increase the revenue, thereby reducing the size of the deficit. Given the level oif income, an increase in the tax ratio, which reflects increasing tax effort, implies a reduction in the public deficit. The only factor that contributes to higher deficit in the partial equilibrium analysis is inflation rate. The significant positive coefficient of the inflation varia'ole in Regression 1 implies that inflation raises the level of public deficit. A plausible explanation for this result is the Tanzi effect, which reducesthe reai value of tax revenue which increased inflation. On the other hand, public expenditure may rise faster than the public revenue.

The decomposition of the change in consolidated non-financial public sector deficits, according to the contributions of variables in Regression 1, is presented in Table 5. The changes due to other factors usually reduced the size of the deficit. The effects of these unidentified factors are prominent in 1973, 1974, and 1979, during which the external shocks occurred. The deterioration in the terms of trade consistently gave rise to public deficit. On the other hand, from 1977 to 1988, the contribution of tax policy variable led to a considerable reduction in the public deficit. By comparing the magnitudes of the contribution to GDP ratio in Table 5, it is evident that the tax policy variable is the most important factor contributing to the reduction in the public deficit in recent years.

The sensitivity of the public deficit due to changes in explanatory variables from Regression 1 is reported in Table 6. Again we found that the public deficit **.s** very sensitive to changes in the tax policy variable. The sensitivity of the public deficit due to changes in external terms of trade is also large. A negative shock would imply a conside'able deterioration in the fiscal position. This finding has an important policy implication on the appropriate strategy of fiscal policy during external shocks. Inflation, which tends to enlarge the public deficit, has a small effect on the deficit, as indicated by the low value of the semi-elasticity. It is possible that inflation 6
rais-s both rovenuv an(i expend **it** ure s_ that the two effects offset each other.

We now turn to the next sectiorn, where the relationship between inflation and the deficit financirng is disc(ussed.

# 4. IMPLICATION OF DOMESTIC FINANCING THE DEFICIT

After 1977 the government attempted tc, reduce the size of budget deficit from 1979 to 1983. ... stown **in** Figure 6, the size of the planned deficit as percentage of revenue reduced substantially from 26.6 percent in 1977 to only 13 percent 1983. Not onlv that the excess of expenditure over re_enue was reduced, the method of financing the deficit was also altered. Table 7 indicates that non-inflationary means of deficit financing was adopted. More heavily reliance on domestic borrowing was made, rather than using treasury cash balance. From 1970 to 1977, the share of cash balance utilization was on average 18.3 percent, as opposed to only 2 percent during 1978 and 1988. It should be noted that the share of borrowing from abroad to finance public deficit was insignificant. Therefore it is not surprising that the effect of the change in foreign interest rate has no direct significant impact on public deficit. Therefore, the foreign interest rate is excluded from the decomposition analysis in Table 5.

The share of borrowing from che Bank of Thailand was reduced from 60.1 to 38.1 percent during the same period. High-powered money financing method was substituted by borrowing from commercial banks, government savings bank, and the private sector through bond-financing method. In particular, the average share of borrowing from the private sector in net domestic borrowing increased from 8.2 to 16.7 percent. Thus, since 1987, the government reduced both the size of the deficit and the reliance on money financing budget deficit.

The relationship between seigniorage and inflation rate is shown in Figure 8. It is evident that the annual increase in monetary base is relatively low, ranging from 0.4 to 1.8 percent of GDP. Moreover, there is no clear relationship between inflation and seigniorage. High infla+ion years such as in 1973, 1974, and 1979 are associated wit' external shocks. Nevertheless, we can further explore the relationship between the demand for money and inflation rate.

In regression 2 and 3, the inverse of the velocity, or the money to income ratio, is explained by inflation rate. Here, we found the positive relationship between inflation and the velocities for both MI and M2. The estimated coefficients of the inflation rate has an implication on money financing deficit. The inverse of the coefficient gives us the maximum amount of inflation tax revenue from printing money. The long-run coefficients of the inflation rate are employed to generate the paths of seigniorate revenues as percent of GDP at various rate of inflation. This relationship is illustrated for both MI and M2 in Figure 9.
Since the demand for r,ioney of the private sector is very respons1ve to the infiation rate, it is very<sup>difficult, for the</sup> govelnment to employ inflation tax. If inflation rate is higher, the velocity will also increase. As a result, the optimum rate of inflation at, which the government can maximize<sup>thetax</sup> revenue will be between 4 percent to 11 percent, for Ml and M2, respectively. This finding is consistent with the evidence<sup>shown</sup> in Figure 8.

# 5, EFFECTS OF PUBLIC DEFICIT **ON** PRIVATE INVESTMENT AND CONSUMPTION

In order to identify direct and indirec' effects of fiscal deficit **on** private investment **and** consumptio..,<sup>we</sup><sup>**employ a single**</sup> equation regression analysis. In Regression 4, private consumption in real terms is regressed on real income,<sup>interest</sup> rate, fiscal structure (ratio of public in, estment to consumption), liquid wea)th in real terms<sup>(beginning period stock</sup> of broad money), public deficit (total<sup>expenditure to tax revenue</sup> ratio), stock of public debt in **real** terms,<sup>and inflation rate.</sup> The regression result does not indicate any direct effect of public deficit on private consumption. However, the indirect effect as captured by real income, interest<sup>rate, and inflation</sup> rate are significant. The insigniticant coefficient of the policy variables can be attributed to the correlation<sup>between</sup> these variables and the indirect factors. Therefore, we can not distinguish appropriately between the direct<sup>and indirect effects</sup> of the public deficit, since the variables<sup>that are intended to</sup> capture the indirect effects are also<sup>affected</sup> by the public deficit in the same equation.

We may conclude that if public deficit stimulates<sup>the economic</sup> expansion, according to the conventional<sup>belief, it will have an</sup> indirect effect on consumption thorough income variable via multiplier effect. On the other hand if inflation is caused<sup>by</sup> higher level of deficit, private consumption<sup>will be reduced.</sup> In other words, private savings will increase<sup>to offset the deficit</sup> of the public sector. However, this does not confirm Ricardian Equivalence hypothesis, since the deficit that raises the interest rate will also induce higher<sup>consumption, according to</sup> Regression 4. Admittedly, the positive effect of<sup>interest rate</sup> on consumption is difficult to explain<sup>unless we assume that the</sup> income effect dominates the substitution<sup>effect.</sup> The effect of public deficit private investment is examined in a similar manner. Regression 5 reports the result from regressing private investment on the<sup>change in income level, the</sup> rate of interest, the fiscal structure,<sup>capital stock, the public</sup> deficit, and inflation rate. It is found that public deficit reduces the level of private investment. The variables on inflation rate, output growth, and the<sup>rate of interest are not</sup> statistically significant. However, the fiscal structure variable is significant and positively related to private 8
investm?rlt le-vel. This finding suggestLs that public investment maY be complementary to private investment. Given the size of publii (deficit, favorabeIt effect on private investment can be obtained if th- public spending structure is bias toward intrastructure. Oni the other hand, the crowding-out effect of public deficit car) b)- diminished if the spending structure is altered towar(d capital rather that-n current expenditure.

Tlr (:on( lusion the effect of public defic.t is clearly negative for private investment, not consumption. While spending structur(- of the public sector has no significant effect o private consumption, it does matter for private investment.

# 6. IMPACTS OF PUBLIC DEFICIT ON REAL EXCHANGE RATE AND TRADE DEFICIT

The real exchange rate which is the relative prices between tradables and non-tradables. The price of the latter is constructed from the calculated price index of several **sectors** such as banking, ownership and dwellings, public administration and services, and service sector. The price of tradables is then calculated from ".he GDP deflator by taking into account the share of value added in GDP from non-tradable sector. The results are shiown in Table 8.

As illustrated in Figure 10, the real exchange rate appreciated substantially between 1979 and 1985, except for a short break in 1921. In Table 5, where decomposition of the public deficit .s made. we have shown that the real exchange rate has a negat.ve impact. on the public deficit. However, the relationship between public deficit and the real exchange rate might be simultaneous.

If the public deficit. increases, given a fiscal structure of public spending, the effects on the prices of tradables and nontradables will be different. The prices of tradable goods are mainly determined 'by external prices, while the price of nontradables will be determined mainly by domestic coniditions. An increase in the level of public deficit will lead to a more proportionate increase in non-tradable price than tradable prices. As a result, the real exchange rate will appreciate when the deficit increases. The negative relationship between the two variables can be easily seen in Figure 10, where the deviation from 1980 -values of real exchange rate and public defic:t are presented.

If the spending structure of the government can also affect the rea. exchange rate. since higher capital spending relative to consumption implies less pressure on the price of non-tradables. The government consumption expenditures will most likely to fall upon non-tradable goods market rather than tradable goods market. We expect that rising share of public investment relative to public consumption would lead to a depreciatiorn in the real exchange rate.

9
The terms of' tradt., which is the relative prices of exports to imports, also affect the real exchange rate, because a given change ir, the pric-e of' exportables<sup>and importables will affect</sup> the pricet. of' tradable and non-tradables<sup>differently.</sup> Moreover, the import content of' the tradables<sup>is larger than that of non-</sup> tradable goods.

The statis cal relationship betwee,n the real<sup>exchange rate and</sup> the terms of trade, the government<sup>deficit, the trade balance</sup> deficit, and the fiscal structure<sup>are shown in Regression 6. The</sup> one-period lag variable of the real exchange<sup>rate is included,</sup> suggesting the existence of the<sup>disequilibrium</sup> price adjustment. We find that the negative relationship<sup>between the real exchange</sup> rate and the public deficit (represented as the ratio of expenditure to revenue) is confirmed. Although the trade deficit variable is not statistically<sup>significant, its impact on the real</sup> exchange rate might be difficult<sup>to separate from other variables</sup> in the equation, due to multicollinearity. The terms of trade has a positive effect on the real<sup>exchange rate.</sup> A favorable shock in the terms of trade leads<sup>to a depreciation</sup> in the real exchange rate.

In Regression 7, we examine the<sup>impact on trade deficit of the</sup> public sector deficit, the prices of<sup>exportables and importables</sup> relative to non-tradable goods prices,<sup>the fiscal structure, and</sup> domestic income level. There is no clear evidence which indicates that public deficit<sup>causes a deterioration</sup> Ot- the trade balance.

There remains large unexplained variations<sup>of the trade deficit.</sup> 'fThe only significant variables<sup>are fiscal structure and income</sup> level. The former causes a widening trade<sup>deficit, the latter</sup> reduces it. One would expect that an increase<sup>in income level</sup> will increase imports and raise the trade deficit. The difficulty with the single equation<sup>partial equilibrium analysis</sup> is the fact that the right-hand variables may not be truly exogenous. Without using the simultaneous system,<sup>one can hardly</sup> quantify the true effect of the<sup>interrelated macrovariables</sup> on the trade balance.

# 7. A MACROECONOMETRIC MODEL<sup>AND ESTIMATION RESULTS</sup>

In partial equilibrium analysis,<sup>spillovers between sectors are</sup> largely ignored. Ini regression 4 and 5, the analysis<sup>is made to</sup> capture the effects of the public<sup>deficit</sup> on consumption and investment. This is done by assuming that there<sup>is no feedback</sup> effects of the changes in consumption<sup>and investment tc the level</sup> of public deficit. It ic important to broaden the<sup>scope of the</sup> analysis to understand how the equilibrium is achieved **in** all markets simultaneously. When the private spending is changed, national income, imports, and the price<sup>level will be affected.</sup> As a result, all maero variables will be affected. The net effects of the public def'ici' can<sup>be examined</sup> by utilizing a small macroeconometric model.

] (
The mode1 (onsists of 45 equations,<sup>28 of which are behavioral</sup> and 17 of' which are identities. The complete model specification is showrn it' Table 9. The lists of endogenous and exogenous variatbles in the model are shown<sup>Tables 14 and 15 in Appendix A.</sup> The simultaneous relationships among<sup>variables in the real sector</sup> are demonstrated throughl the national income identity, where income level comprises of private<sup>and public spending.</sup> In turn, under the hypothesis that<sup>private aggregate spending depends on</sup> pprmanent. income, thus income level<sup>also affects private spending</sup> level simultaneously. The interlink between the<sup>real sector and</sup> the monetary sector is made<sup>via the credit availability effect in</sup> the investment function<sup>and via the income effect on the demand</sup> for financial assets. For the price level, it is determined<sup>by</sup> external influences and the excess demand conditions in the domestic market.

The real sector of the model was<sup>estimated by the instrumental</sup> variable method. For the private portfolio and the benk portfolio blocks, the Seemingly<sup>Unrelated Regression method was</sup> employed to improve the efficiency<sup>of parameter estimates.</sup> The Cochran-Orcutt iterative technique was utilized whenever an autocorrelation was detected. Annual data were employed from 1'70-1987. Sources of data were the National<sup>Economic and Social</sup> Development Board, the Bank of Thailand, and the IMF International Financial Statistics. Results of Estimation are provided in Appendix B.

# The Trade Sector

Thailnd is considered as a price taker<sup>in the world market. On</sup> both imports and exports, the small country assumption was adopted.<sup>1</sup> / Thus, only the demand equations<sup>for imports and the</sup> export supply equations are included in the model. Export commodities are separated into agricultural and industrial products. The prices of agricultural exports and industrial products are determined by<sup>the world price levels.</sup> The demand for merchandise imports are classified into three categories: agricultural products, industrial products, and petroleum products.

The quantity of agricultural exports supplied depends on its previous year's net export<sup>price reflecting the lag adjustment</sup> pattern of agricultural production. Nevertheless, the current domestic price of agricultural products is also included, indicating the possibility for exporters to choose between supplying to foreign or domestic<sup>ma-kets.</sup> The substitution is made, not between supplying<sup>to export markets and non-tradable</sup> sector, hut between supplying to export markets and domestic ______________ 1/ Although Thailand affects the world export prices of rice and cassava, their share in Thailand's total exports reduced continuous>' from 25 percent<sup>in 1970 to only 13 percent in 1989.</sup> 11
market. Therefore, the real exchange rate, or the relative price of exportables to noni-tradable prices are not relevant<sup>in this</sup> equation, since we are disaggregating exportables into different categories of exports. The effective exchange rate should then be employed, since it affects the decision whether to supply<sup>at</sup> home or abroad. There are both theoretical and empirical justification for including the effective<sup>exchange rate in the</sup> exports and import functions.

Furthermore, the homogeneity assumption embodied in the price ratio variables in imports and exports<sup>equations have long been</sup> questioned by various authors [Haynes<sup>and Stone (1983), Wilson</sup> and Takacs (1979)1. The weakness of this assumption is that<sup>it</sup> contains the influence of the two price<sup>variables to be equal in</sup> magnitude but opposite in sign (Murray<sup>and Ginman, 1976).</sup> In **the** study of import demand and export demand functions of 19 industrial countries, Warner and Kreinin<sup>(1983) found that it is</sup> not justified to employ a composite relative price variable; separation into its components yields more accurate results, because import and export unit value indexes and domestic wholesale price index are constructed with<sup>different weights,</sup><sup>**and**</sup> usually different formulas, the homogeneity<sup>constraint would be</sup> inappropriate in practice. In this paper, we choose to test the propriety of the homogeneity constraint by separating the composite relative prices.

The quantity of agricultural exports supplied varies in the opposite direction of the change in the<sup>current domestic price</sup> level of agricultural products. Furthermore, the one year lag of the quantity of agricultural exports supplied<sup>is also included as</sup> an explanatory variable to capture disequilibrium quantity adJustment. The share of agricultural products in GDP<sup>was first introduced in</sup> the agricultural exports supply equation to capture the<sup>output</sup> capacity, but the negative correlation<sup>was observed.</sup> The reason comes from the changing structure of the<sup>Thai economy.</sup> While the share of agricultural products in GDP is declining as Thailand approaches a NIC status, the export values of agricultural products are still increasing.

Instead, the agricultural export production capacity in this sector is represented by the aggregated value added of agricultural products and the value added of the remaining sectors excluding industry and services. While the former is endogenously determined from the production function in the model, the latter is an exogenous variable, representing the effect of the expanding role of the government<sup>in providing basic</sup> infrastructure facilitating the production, transportatiorn,<sup>and</sup> marketing of agriculture products.

Unlike the agricultural exports supply<sup>equation, the production</sup> capacity is represented by the share of industrial<sup>products in</sup> GDP. It should be noted that the high<sup>value of the estimated</sup> 12
coefficient, of the share of industrial product variable suggests that the changing structure of the economy cause a massive contributioni to the rapid growth of industrial<sup>exports.</sup> Since industrial exports may affect the share<sup>of industrial production</sup> in CDI', the lagged value of industrial share<sup>was employed</sup><sup>**in**the</sup> estimated equation.

The movement of the current account is captured by endogenizing the exports and imports of services. Since the main component of export services is travel receipts, the quantity demanded for export services would depend on real world<sup>income (in baht).</sup> In addition, a dummy variable for 1980-1987<sup>is added to capture a</sup> period of dramatic increase in the number<sup>of foreign tourists.</sup> Imports of services depend on the total trade<sup>volume,</sup> since freight, and insurance expenses tend to grow with<sup>the quantity of</sup> merchandise imports and exports. Two dummy variables are added into the service imports equation. The first dummy captures the 1973 and 1984 period of a reduction in import services due to tight monetary control. The second dummy capture the positive impact on imports of services due to the oil price<sup>shocks in 1979</sup> and 1980.

The specification of the three merchandise demand<sup>for imports are</sup> quite similar. Included in the import demand functions are their owrn price variables (in baht currency) with their corresponding tariff rates, their domestic competing product<sup>prices, the real</sup> income trend, and the ratio of actual real income<sup>to trend real</sup> income. The motivation for including the last variable is to capture the impact of the real growth rate<sup>on the quantity import</sup> demanded (Khan and Rose, 1975). Thus, the income elasticity is not constant, but it is able to vary whenever actual income deviates from the trend income.

The lagged dependent variable was initially<sup>included in the three</sup> merchandise import demand equations to allow disequilibrium adjustments. However, only the import demand for agricultural products attains a satisfactory level of significance. Thus, this variable is excluded from the other two<sup>import equations.</sup> The obtained values of the import and domestic<sup>price elasticities</sup> of import. demand for agricultural imports and<sup>industrial products</sup> are in different magnitudes. It clearly suggests that it is inappropriate to force the homogeneity assumption. Except for the petroleum products, whose domestic and<sup>import price indexes</sup> are not subJect to aggregation problem, it is obvious that the same percentage increase in import price and domestic price<sup>of</sup> the competing products will lead to a different<sup>responsiveness of</sup> imports.

All import price elasticities are less than unity,<sup>suggesting the</sup> difficulty of finding the product substitutes. The import demand for petroleum products is the least elastic. The effects of the oil price shock on the current account<sup>will be substantial.</sup> 1 3
The estimated results shop. that the elasticity of income trend variable is greater tharn unity tor both agr-icultural and manufactured imports. It suggests that the quantity demanded for these kinds of imports **is** sensitive to the trend incomt growth rate. Furthermore, the coefficients of the ratio of actual income to trend income variable are high, especially **in** the demand for petroleun, imports. The deviation from income trend elasticities import demand for agricultural, manufactured, and pet.roleum products are 1.25, 1.85, and 3.39, respectively. As mentioned earlier, it means that there will be a substantial increase in the quantity demanded for imports during economic boom. This finding has a policv implication on the stabilization policy: contractionary policy will be very effective **in** reducing the current account deficit.

# **Aggregate demand and supply**

It has been argued that an appropriate econometric model for developing countries should focus on the supply rather than the Keynesian demand determined model. The first two equations in this block represent the production functions of the economy. The aggregate production is decomposed into two products: agricultural and industrial products. Both equations depend upon the amounts of corresponding capital stocks, the real import values of petroleum products, and the number of labor employed in the corresponding sector. It should be noted that our model explicitly links the international transmission disturbances with domestic supply via the petroleum imported inputs.

On the aggregate demand components, private consumption expenditures depend on real disposable income and consumption of the previous period. The lagged variable reflects either the effect of persistent habit or distributed income lags, according to the permanent inccme hypothesis. The estimated short-run and long-run income elasticities are 0.47 and 0.96, respectively. Thus the impact of a change in current income on current consumption is significantly different from the long-run effect. 'The specification of the consumption function in equation (10) still maintains the indirect effects of public deficit since both income and price variables are included.

If the interest rate is controlled, credit rationing is unavoidable. Credit rationing is now regarded as an important part of the transmission mechanism of for monetary policy. But credit. is likely to be rationed even without interest control or with perfect capital waobility. Stiglitz and Weiss (1981) argued that because the asymmetric information under uncertainty between lenders and borrowers, credit rationing is likely to occur, and the interest rate will not clear the market. In the MIT-PennSSRC model, monetary policy affects t'ie credit availability and thus the volume of investment without necessarily affecting the interest rate. The interest rate variable has been tried in the investment equation (Regression 5). It has a positive sign and statistically insignificant. It is argued here that, regardless 1 .1
of the degree of' capi tal mobil it ,, investment is, affected b..: thtadditional quantity of' bark credit a I ong at the ra;te of' interest does; not clear thmarkert. Tobi **II** 1978 hIas a Ist, emphasized the importanicof' **the cre(lit avai** labilit! v fffect of' monetary policy.

Pri v at e in ve stme n t be h avi o r i -; expl) a i n e- d b) y t he f'l te xil)le accelerator hypothesis. The spee-d of' adj ustmenrt b etwe en t h,actual and the desired level of capital stock varies according to the size of the additional bank cred±t r, lative t() the gap between the desired and actual level of capital stock. I'he credit availability effect is the important channel linking the real and financial sector in this model. In addition, adjustment of the actual capital stock to the dlesired level is made f'aster with the additional amount of domestic money supply and foreign capital inflows. Thus money financing deficit will affect the domestic investment in a similar manner with the bond financing deficit, if the latter raises domestic rate of interest and induces more capital inflow.

The estimation results from equation (11) indicate that there is a significant relationship between investment and the availability of loanable funds from the government-issued money, bank credit, and foreign savings. The output elasticity of the demand for capital stock is greater than one, indicating that private investment responds vigorously to the expansion of output.

Government revenue function is estimated in equation (12). It. depends on aggregate imports and real domestic absorption through import tariff revenues and indirect taxes. The lagged endogenous variable included in the tax function captures the effect. of lag revenue collection .

# The Price Block

The approach taken in this block is to model the determination of the rate of change in GDP deflator. After that we can link the GDP deflator with domestic prices of agricultural and industrial products. The identity (45), explaining the domestic price of the remaining sector, i.e., public utilities and services, is imposed to comply with the homogeneity condition. It is argued here that the inflation rate in Thailand is determined by both internal and external impulses. Inflation is directly related to the demand pressure variable, which is the internal im.pulse represented by the Okun gap, i.e., the ratio of the level of aggregate demand to the capacity output. External sources of inflation originate from imported inflation and export demand pressure via changes in agricultural, product prices. All estimated coefficierts of the explanatory variables give the expected signs with high level of significance. Although the rate of change in money supply does not appear in the inflation equation, it by no mieans denies the fundamental proposition of the monetarist. In t.his model the effect of monetary impulse 1 \
exerts its influence on the<sup>aggregate demand through the rate of</sup> change of bank credit in the<sup>investment function.</sup> The domestic price level (GDI1 deflator) determines domestic agricultural and industrial product<sup>prices.</sup> It should bf- rioted that the estimated coefficients<sup>of the GDP deflator in equations</sup> (14) and (15) are not significantly<sup>different from unity.</sup> This implies that these two prices,<sup>including the</sup> domestic prices of service and utilities, which<sup>is determined by identity (45) move</sup> proportionately in the long run, which is the result of the constant weighting index system.

The domestic agricultural and<sup>industrial product prices in turn</sup> enter the corresponding import demand functions, allowing the substitution effects to take place between<sup>domestic and import</sup> products. The relationship between the aggregate import price index and its three desegregate<sup>components are shown in the last</sup> equation of the price block.

# **The financial Block**

# **The** interest **rate and capital**<sup>**flows**</sup>

There are three behavioral<sup>equations in this block:</sup> The loan demand, the foreign capital<sup>inflows, and the net foreign assets</sup> equations. The demand for loan equation and the loan supply equation shown in the bank portfolio<sup>sub-section simultaneously</sup> determine the commercial banks' lending interest rate<sup>and the</sup> amount of bank credit. The demand for loan depends negatively<sup>on</sup> the bank lending rate and positively<sup>on the foreign interest rate</sup> and the ceiling lending rate<sup>regulated by the Bank of Thailand.</sup> An increase in the foreign<sup>interest rate will lead to a higher</sup> demand for domestic credit due<sup>to a negative substitution effect.</sup> On the other hand, an increase in the ceiling rate,<sup>when the</sup> ceiling rate is binding, permits commercial banks to adjust lending rate to the equilibrium level, thereby allowing the volume of bank credit to increase. The lagged interest rate level reflects the lagged<sup>adjustment of the domestic</sup> interest rate to the new equilibrium<sup>level.</sup> Net capital inflows, as<sup>specified</sup> in equation (18) depend on activities at home and abroad: interest rates, the exchange rate, price levels, and<sup>foreign income level, proxied</sup> by the level of industrial production in developed countries. The theoretical justification<sup>of this equation is provided by Niehans</sup> (1984). Again, it is not necessary to force the homogeneity condition for the price level. As the estimated results show, there is a marked difference between the coefficients of the absolute price level. Separating the composite price<sup>ratio into</sup> exchange rate, and absolute<sup>price level allows us to test the</sup> appropriateness of the homogeneity<sup>assumption.</sup> The signs of the estimated coefficients<sup>indicate that an increase</sup> 16
in the levels of industrial production in industrial countries, domestie interest lending rate, foreign<sup>and domestic prices of</sup> industrial products will lead to an increase in net capital inflow. On the other hand, net capital inflows are reduced<sup>asa</sup> result of the increase in the foreign<sup>interest rate.</sup> However, for a given equal percentage increase in domestic and foreign interest rates, there would be a net<sup>foreign capital inflows, for</sup> net capital inflows is more elastic<sup>to domestic interest rate</sup> than the foreign interest rate. It might be easier to bring the money in than to take the money out. This suggests that the capital mobility is far from perfect. The domestic interest rate is usually above the foreign interest rate. In addition to country risk and foreign exchange<sup>rate risk, the withholding</sup><sup>**tax**</sup> on the interests paid to foreign borrowing<sup>obstructs the capital</sup> mobility. The withholding tax was employed frequently in the past to control capital account. To stimulate capital inflows, the government would temporarily abandon the tax rate. To prevent the influx of the capital inflows,<sup>the government would</sup> reimpose the withholding tax rate. In addition, sterilization of capital inflows was made in order to conduct the monetarist school policy.

Depreciation of the effective exchange<sup>rate stimulates excessive</sup> foreign borrowing. Net capital inflows consist of the capital movements via portfolio investments and<sup>long-term direct foreign</sup> investment. The rise in foreign price level indicates induced capital inflow due to comparative cost<sup>advantage of producing the</sup> same product in Thailand. The estimated coefficient of the domestic price variable shows a positive<sup>sign with insignificant</sup> level.

Net foreign assets in baht (equation 19) depend on foreign capital inflows, the size of the current<sup>account deficits, and</sup> the exchange rate of the baht vis-a-vis other currencies. Alternative specification was made in the form of identity. However, the simulation errors are<sup>substantial relative to the</sup> functional specifi2ation, suggesting that there might be some unaccountable items due to capital outflows, which can<sup>be more</sup> appropriately captured by a behavioral<sup>equation.</sup> The estimated coefficients in the net foreign assets equation have expected signs. The impact of the current accounts deficits on the level of net foreign assets is clearly shown by its statistical significance. These results imply that the central bank can control only some portions of<sup>the monetary base.</sup> The dummy variable captures the unusual increase<sup>in net foreign asset</sup> in 1987.

# **The Private Portfolio Block**

Portfolio allocations of the private<sup>sector can be explained in</sup> the following manner. First, the private sector chooses<sup>between</sup> holding interest-yielding financial assets (7) and non-interest yielding financial assets such as demand<sup>deposits and cash.</sup> The

**1** 7
vari **alI t** ir('IUd(f san rig deposits, time deposits, and g( vfrrnmerit honds. The demarld for these interest rate yielding _asst9f't_ arid demarlnI d(fposl ts are assumed to be homogeneous in nom na<sup>1</sup> _Irio(ome, ._ Thius, ifemaria( for tnese assets **wi I** change propo-t onotely wi t.h the clhange inr nominal income. 'I'he, aliovat-ori of' 2. ari( demand deposits will depend on the rate of retIurn on 2., which 1s the weighted average of<sup>the</sup> rates of interest , and th,' cost of holding financial assets, i.e. inflat-ion rate. As the regression results indicated<sup>in equations</sup> (21) arid (22), tiie rate of return on Z has a negative impact on lemarn(d de-posit and a positivH impact on the aggregate interestyielding assets. Inf'lation rate causes a reduction in the demand for financial assets. The negative impact of inflation is stronger in the case of interest-yielding financial assets than in thte case of deman(d deposits.

Unce the quantity of interest-yielding aggregated assets is determined, the portfolio allocation into time deposits,<sup>saving</sup> deposits, andi government bonds can be determined. The latter variable is determined by identity, according to the adding-up constraint. The shares of time deposits and saving deposits<sup>can</sup> be determined by equations (23) and (24), which indicate that all relevant rates of return in this set of portfolio are included. Lagged endogenous variables are included to allow lisewquilibrium stock adjustment. The estimation results obtained by the seemingly unrelated regression<sup>improved substantially over</sup> the results obtained by the OLS method. The estimated coefficients of' the own rate of return variables and the crossrato of return have the expected signs.

# **l'he** Bank Portfolio Block

The total deposits of commercial banks are determined by the private sector portfolio allocation. The total deposits are deman(d determined, constituting domestic sources of available funds. However, conmmercial banks can choose to expand their activities bV enlarging their portfolio size through foreign borrotwing. Commercial banks' foreign liabilities are hypothesized to depend on the r lending volume, available domestiP resources, the relative cost<sup>of borrowing from either</sup> the central bank (discount rate) or from<sup>abroad (foreign interest</sup> rate). The estimated results are shown in equation<sup>(25).</sup> The estimatec( elasticities indicate that foreign borrowing will increase more rapidly than the increase in domestic lending. Another important finding is that the rediscount rate of the central bank can be used to stimulate or discourage foreign borrowing of conimer(ia' banks. Since foreign interest rate affects av:;ilabie financial resources of commercial banks,<sup>this</sup> equation serveF, as _an_ international linkage between domestic<sup>and</sup> international money markets.

Unef the available- f'irnancial resources are determined,<sup>commercial</sup> banks decidu h(ow to allocate their portfolio into government _1_ 8
bonds (GfBi; , foreign assets (Fa) , cash and<sup>reserves (CAb), and</sup> loans (L,. Since the rates of interest of<sup>these assets tend to</sup> move I). the sante direction, multicollinearity problem is enrountered inr estimating bank portfolio equations. In addition, there are some regtilations oii bank portfolio. For example, commerclal barnks must hold government bonds up to a certain percentage ini order to be allowed to increase the number of their branches. Not all of these rates of return<sup>are included in the</sup> estimatint equations In this block. The estimation results are shown in equations (26)-(28).

# The Identities

The identities consist of definitional<sup>equations.</sup> They comprise the following items: monetary base (B), total deposits of commercial banks (D}, notes in circulaticn (CAp), which is the balance sheet of the Bank of<sup>Thailand, the government bonds held</sup> by non-bank private sector (GBp),<sup>which is the difference between</sup> total interest-yielded financial assets (Z) and time and<sup>saving</sup> deposits. The balance sheet of commercial banks is imposed<sup>by</sup> specifying identity (33), relating commercial banks' borrowing from the central bank (Hb). Other identities include aggregate exports and imports, trade<sup>balance and current account balance,</sup> domestic absorption (A), national income identity, the excess aggregate demand (E), budget deficit (Dg), and the claims on government by the Bank of Thailand<sup>(Hg).</sup> Identity (44), explaining Bf,<sup>is in fact the government budget</sup> constraint. Bf is modeled as a residual from other means of deficit financing. This implies that the government<sup>will adjust</sup> the level of external debt to<sup>accommodate the fiscal position.</sup> In pract4ce, the Thai government prefers early retirement of external debt. to domestic<sup>debt when the budget is in surplus.</sup> The size of monetary base varies<sup>according to the movements of</sup> claims on government and commercial banks as well as the net foreign assets. Consequently, the monetary authorities can control only the domestic source<sup>of monetary base, since the net</sup> foreign asset component of the monetary base varies by balance of payments condition under the fixed exchange rate regime.

# 8. IMPLICATION OF PUBLIC DEFICIT

What is the implication of public<sup>deficit on current account and</sup> other macro variables' The relationship between public<sup>deficit</sup> and current account deficit<sup>is shown in Figure</sup> 11. Although there is a clear negative correlation<sup>between the two, the causal</sup> structure of the relationship<sup>is unclear, since current account</sup> deficit may lessen the size of public deficit if the major component of tax revenue is<sup>tariff revenue. Furthermore,</sup> there might be a third factor that<sup>is positively related to the current</sup> account deficit, but negatively related to the public deficit.

As argued earlier, the partial equilibrium analysis cari be 19
broaden by taking into account the simultaneous relationship among macro variables in the economy. The implication of public deffi t can then be analyzed hy examining the counterfactual simulatiorn of public: deficit from the constructed macro econometri( model. Hefore _we_ proceed to the policy simulation, we nee(d **t',** validate the estimated model by historical simulation.

# 8.1 Historical **simulation**

Historical simulations of the model were employed to determine themodel ability to replicate the real world. The predictive performance of the model can be determined by comparing the predicted paths of each variable with the actual paths in the sample period. The root mean square errors (RMSEs) from the statiP and dynamic simulations for the 1976-1980 period and for the 1981-1986 period are presented in Table 10. The solutions derived from the static and dynamic simulations for the period mentioned above are fairly satisfactory. The RMSEs from dynamic simulation vary from 2.4 to 63 percent of its means value.

Large simulation errors mainly arise from definitional equations, for example, the trade and current account deficits. The predicted paths of all endogenous variables turned out as expected. In comparing the RMSEs from both simulation periods, it seems that the model performs better in the period 1981-1986, possibly due to the absence of major shocks which were predominant durino the earlier period.

Theil inequality coefficient (U) is the RMS errors scaled down by the denominator such that its value always falls between 0 and 1 (Pindvck and Rubinfeld, 1981). A zero value of U indicates a perfect fit when the simulated value equals the actual value in every period. The Theil's inequality coefficients calculated from 1981-1986 dynamic simulation with the breakdown of their components are presented in Table 10.

# **8.2 Counterfactual simulation of the effects of public deficit**

We performed three simulation exercises to determine the effect of public deficit on macro variables. The public expenditures were hypothetically raised by 5 percent of their actual values from 1981 to 1986. Different methods of financing the increased spendina are assumed: (1) money-financed deficit, (2) taxfinanced deficit, and (3) bond-financecd deficit. The impact on endogenous variables are reported in Tables 12, 13, and 14, respectively.

When performing policv simulation of the effect of money-financed defirit, the claims on government by the central bank (Hg) was raised by the same amount as the increase in government spending. Hg became ani exogenous variable in equation (44), which was an identitv determining the amount of foreign borrowing (Bf), a residual in the government budget constraint. The increase in Hg 20
directly entered t.he monetary base equatior. (29), which **in** turn affected the quantity of money through identity (31).

Since thf. private sector has more quantity of working capital, the adjustment between the desired and actual level of capital stock becomes faster. Therefore, investment spending **_is_** increased as indicated in Table 12. Wheni income grows, it generates higher consumption expenditures and demand for imports. Consequently, trade balance will worsen. In addition, the size of the public deficit wil' be changed since increased imports will enhance tariff revenue collection. Moreover, consumptiorn will **be** affected when the disposable income is reduced by the taxation.

As the demand for imports of petroleum products grows, it feeds back into the production function of both **agricultural** and industrial products. Consequently, the supply constraints of export capacity is relaxed. Thus, the widening trade balance deficit will be partially offset by the incrtase in exports. If' the aggregate demand rises faster than the output capacity, the demand pressure variable will speed up the price adjustment. In turn, the domestic prices of agricultural and industrial products are raised; thereby reducing the incentives of exporters to supply abroad.

In the financial sector, when income and price level are affected, the demand for financial assets as specified in equations (20)-(23) will be altered. An increase in the domestic price will reduce the demand for interest-yielding assets, while an increase in income level will raise it. The result from Table 12 indicates that the income effect will dominate the substitution effect. Therefore, we observe an increase in banks' deposits, which may reduce the banks' foreign borrowing. On the other hand, increased deposits necessitate banks to expand credit. As a result of the credit expansion, investment demand rises due to credit availability effect. The simulation results in Table 12 also indicate that the banks' lending rate declines. According to equation (18), foreign capital inflows are reduced, which implies that the capital mobility will reduce the impact of money-financed deficit. Investment could have expanded larger if the foreign capital inflows did not decline as a result of the money finance deficit.

When conducting policy simulation for tax-financed deficit, the constant term in the tax revenue equation (12) was raised by the same amount of the increased spending. The treatment of the variable Hg in the government budget constraint was the same as in the case of money and private bond financed budget deficit. In the case of private bond financing, it was assumed that the substitution occurred between time deposits and government bonds. In other words, the variable GBp was exogenized in the identity (32), which became an equation determining time deposits. The behavioral equation (22) explaining time deposits was then dropped.

21
The impart of public deficit on the domestic rate of intoeest is small a- expected, sin(-e it is mainly determiried by thte foreign interest rate. Since privateinvestment is responsive to credit availab ilit y, the money-financed budget deficit producelsthe mcst expansionary result. Because the income elasticities of demand for imports are high, the expansion in economic activity as a result of public deficit causes a considerable increase in imports. Moreover, the price level rises most in case of money financed deficit, export competitiveness declines most i.i this case. As a result, money-financed deficit causes a deterioration in the current account.

Figures 12, 13, and 14 illustrate comparative impacts of different methods of deficit financing **on** income, the price level, and current account deficit, respectively. It is obvious that although tax-financing method is less expansionary than other methods, it produces the least inflationary pressure and causes the least current account deficit.

# 9. CONCLUSION

The size of public deficit did not grow substantially since it was constrained by the size of public revenues to comply with the budgetary law. The actual spending of the central government is usually below the planned expenditure level, while the planned level of revenue is overestimated during economic slump and underestimated during economic boom. Given the level of spending, the size of the deficit. is countercyclical in nature.

On the revenue side, the tax capacity has increased gradually over time, as indicated by the increasing ratio of tax revenue GDP ratio. The ability of the government to increase its tax revenue relative to GDP has been increasing over time. According to the decomposition analysis, the 4 ncrease in the tax ratio is the major factor contributing to a reduction in public deficit in recent years. In addition, there has been an increasing degree of automatic stabilizers and a decline in the dependency of foreign trade tax.

The pattern of deficit finance has contributed to macroeconomic stability. During the period of high deficit, the government relied less on borrowing from the central bank and relied more on borrowing from commercial banks and the private sector. As indicated by the simulation results, the money-financed public deficit causes a higher inflation rate and a more worsening current account deficit than any other methods of deficit financing.

The Thai government was able to control the growth of public spending and was successful in raising tax revenues. The simulation results also indicate that tax-financed budget deficit does not create pressure on the domestic price level. The strong growth of the Thai economy in the past can be attributed partly '- '
to appropriate fiscal policv applied during the period ot external shocks. The stable price level in turn led to a depreciation of the real effective exchange rate, further strengthening export and output growth.

In recent years, the central government deficit turned into a surplus. The continued high growth rate in the last three years produced unexpected rise in tax revenue, while the growth of public expenditure was effectively controlled. The accumulation of the large amount of treasury cash balance prompted the government to adopt an early retirement plan for foreigrn debts. In the 1991 fiscal year, it was the first time in recent history that the Thai government planned to run a balatnced budget.

23
# REFENCES

- Barro. Robert J., "The Ricardian Approach to Budget Defieits," Journal of Economic Perspectives, Vol.3, Number 2, Spring, 1989, 37-54.

- Havnes, S. and Stone, J., "Specification of Supply Behavior in International Trade," **Review of Economicjs and Statistics-,** 65, 1983b, 626-631.

- Khan, Mohsin S., and Knud, Z. Ross., "Cyclical and Secular Income Elasticities of the Demand for Imports," **The Review of Economics and** Statistics, August, 1975, 357-361.

- Krugman, Paul and Lance Taylor., "Contractionary Effects of Devaluation," **Journal of International Econumics,** August, 1978, 445-456.

- Murray, T. and Ginmam, P., "An Empirical Examination of the Traditional **Aggregate** Import **Demand** Model," Review of **Economics and** Statistics, 58, 1976, 75-80.

- Niehans, Jurg., **International Monetz.'y** Economics, Baltimore, MD: The Johns Hospkins University Press, 1984.

- Pindvck, Robert S., and Rubinfeld, Daniel L., Econcmetric Mbdels **and** Economic Forecasts, Second Edition, New York: McGrawHill Book Company, 1981.

- Stiglitz, Joseph E., "Money, Credit, and Business Fluctuations," The **Ecroomic** Recond, December 1988, 307-322.

- Stiglitz, Joseph E., and Weiss, Andrew., "Credit Rational in Markets with Imperfect Information," American Economic Review, Vol.71, No.3, June, 1981, 393-409.

- Tanzi, Vito., "Fiscal Policy, Growth, and the Design of Stabilization **Programs," Fiscal** Policy, Stabilization, and Growth in **Develoopin** Countries, Mario I. Blejer and Ke-yourng Chu (ed.), IMF., **September,** 1989, 13-49.

- Tanzi, Vito., "Fiscal Policy Responses to Exogenous Shocks in Developing Countries," **American Economic Review,** Vol.76, No.2, May, 1986, 88-91.

- Tobin, James. "Monetary Policy and the Economy the Transmission Mechanism," **Southern Ec3c30ic** Journal, **January** 1978.

- Warner, Dennis., and Kreinin, E. Mordechai., "Determinants of International Trade Flows," **The Review of Economics and** Statistics, Vol.L)XV, Number 1, February, 1983, 96-104.

24
Wilson, J. F. and Takacs, **W.,** "Differential Response to Price and Exchange Rate Influences in the Foreign Trade of Selected Industrial Countries," Review of **Economics** and Statistics, 61, 1979, 267-279.

25
PERCENT L; <!-- Start of picture text --> t 0<br>- C;'~~~~~~~~~~-<br>::zJ ~ ~ ~<br><!-- End of picture text -->
# **F1IaE 2** BALANCE OF PAYMENTS

<!-- Start of picture text --> 0.08 ,<br>0.06- _ _..<br>0.04-<br>X. 0.02X<br>0-<br>U. U<br>-.02- 0 - -- --7 / t ___ _<br>o /mI\<br>-0.06 __<br>-<br>-0.08- _- _ U<br>-0.1- ,,,4I,6,,a,...<br>1970 1972 1974 l76 l97 198 N8Z 884 8<br>YEAR<br>Lin- TRADE BALANCE E3 OVERALL BALANCE<br><!-- End of picture text -->
Figure **3** <!-- Start of picture text --> CONSOLIDATED NON-FINANCIAL<br>PUBLC SECTOR DEFICIT<br>25 -1<br>20-~<br>15-~ ~ ~~~3<br>0-<br>-51<br>870 872 874 876 878 880 882 884 86 888<br>Note: d s central governme delk*<br>C- GGDP i VGDP (G-R,VGDP EDd/GDPl<br><!-- End of picture text -->
# rigtire 4 CONSOLIDATED NON-FINANCIAL PUBLIC SECTOR EXPENDITURE

<!-- Start of picture text --> 25--<br>20-<br>5-<br>0<br>1970 1973 1976 1979 M82 M85 ~ 88<br>YEAR<br>m WAGES & S'ILARES M NTEREST PAYMENT M FIXED 1WESThlEW UM GOODS & SERVICES<br><!-- End of picture text --> I '
FIURE 5 TAX STEUCTURE OF THAILAND <!-- Start of picture text --> 0~<br>CO) 4- # |0 m1<br>170 172 V74 S76 V78 8 8 W4 6 a8<br>YEAR<br>-<br>|- INCOME * IMPORT BUSINESS<br>|f SALES C OTHERS<br><!-- End of picture text -->

3 0
Figure 6

# PUBLIC **DEFICIT**

<!-- Start of picture text --> 025-<br>0.3<br>025-<br>02-<br>0.1-<br>~0.06-<br>-0.05-<br>-0.1<br>2 7071 7273 7445 7A TT 7879808182838485868788<br>(FicaI Year)<br>PLANNED -- ACTUAL<br><!-- End of picture text --> 31
<!-- Start of picture text --> DEBT SERVICE RATIOS<br>22-<br>20<br>IB<br>70712n73 74 75 76 77 78 798081 8283 8485 86 87 88<br>|-uTOTAL +~ PRVATE -- PULI<br><!-- End of picture text -->

32
<!-- Start of picture text --> Fi'aRE B<br>INFLATION RATES AVND SEIGNIORAGE<br>1.8=<br>_ ~~~87 72 ,73<br>-t6-<br>1.4-<br>z ~~~~~~~78 79<br>~12- I<br>71 a74<br>_ 76<br>4s 1-<br>,.- 86 _ 75<br><H 83 82 77<br>Y 85<br>0.6-<br>-<br>8,1<br>84<br>0 54 X 20 25<br>INFLATION RATE<br><!-- End of picture text --> 33
FIGURE 9 SEIGNIORAGR **E** VENUE <!-- Start of picture text --> 45<br>2.5 - I I<br>2T RA<br>05 2.5 4.5 6.5 85 t5 ... 5 k5 ,5. .ES<br>RIFIATION RAE7<br>COMPUTED FROM MI1 COMIDUTED FROM M2<br><!-- End of picture text --> 3 4
<!-- Start of picture text --> FRn t<br>REAL EXCHANGE RATE AND PUBLIC DEFKCfT<br>C<br>M 40- 20 cc<br>WJ30- 1<br>-<br>M \ .X\\.p<br>-20q<v< < h0s<br>Q 50 | REAL DEFICIT0E)(CHANGE RATE - PUBLIC -20<br>[ -40- --60 w<br>190 172 ~74 ~76 ~78 1~60 lk2 1984 I86 1888<br>BASE YEAR = 180<br>-U-REAL EXCHANGE RATE - 4-- PUBLIC DEFCKT<br><!-- End of picture text -->

35
<!-- Start of picture text --> PUBLIC DEFICrT AND CURRENT A/C DEFICIT<br>8-<br>6- -f<br>Li.<br>;g)- ,1 /y / eV 3<br>i,-| I 41'S<br>0*<br>70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88<br>YEAR<br><!-- End of picture text -->

# **+-** DG/GDP CAD/GDP

36
rigure 12 <!-- Start of picture text --> Effects of Public Defici or<br>Income Level<br>«o0.6- i<br>0O4-<br>E<br>°& 02-eI<br>0-<br>02-_<br>u 4<br>-0.6<br>Money Finance i- Tax Fhance Bondnance|<br><!-- End of picture text -->

37
Percentage Deviation from Base SoAluon <!-- Start of picture text --> CD~~~~~~~~~C<br>o o o O O o o~~~~~=<br>M 8o0 2°i<br>CD 0<br>CDc<br>I~~~~~~~~~~~~I<br>+~~~~~~<br><!-- End of picture text -->
<!-- Start of picture text --> Figuire 14<br>Effects of Public Defick on<br>Current A/C Defickt<br>5 10-~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~-<br>.2~~~~~~~~~~~~~~~~~~~~~~~~~~~~<br>E<br>-io-~~~~~~~~~~~~~~~~~~~~~~~~-<br>15-<br>-20- r<br>-|- Money Fkw -I-4- Tax France A Bond Fkance<br><!-- End of picture text -->

3 _9_
Table 1 Expenditure Structure: Central Government (period average)

|----------------------------------------------------------|||(Percent)<br>__--------|
|---|---|---|---|
|Rate of Change|1971-74|1975-85|1986-89|
|TOTAL EXPENDITURES|8.86|<br>17.42|<br>7.35|
|Economic classification:-||||
|Current|13.91|<br>17.49|<br>8.00|
||(75.04)|(78.78)|(85.79)|
|Interest payments*||<br>~<br>13.11|~~~~~<br>,<br> <br>37.31<br>|<br>8.19<br>|
||(1.58)|<br>(4.75)|:(10.09)|
|Others|13.93<br>|<br>16.60<br>|<br>8.17<br>|
||(73.46)|(74.03)|:(75.70)|
|Capital|-4.97|<br>17.98|<br>4.36|
||(24.96)|(21.22)|(14.21)|
|Major functional classification:-||'<br>||
|Economic services|-1.99<br>|<br>16.27<br>|:<br>7.72<br>|
||(22.70)<br>|(19.97)|:(14.62)|
|Social services|:<br>12.35|<br>17.36|<br>8.12|
||(28.35)|(30.13)|(29.76)|
|Defence|13.64<br>|<br>18.06<br>|<br>2.72<br>|
||(19.65)|:(19.53)|:(19.41)|
|General admin. & services|11.38|<br>16.15|<br>8.68|
||(14.45)<br>|(13.38)|(12.83)|
|Unallocable items|:<br>15.72<br>|<br>21.42<br>|<br>10.04<br>|
||(14.85)|:(16.88)|:(23.39)|

Sources: 1. Customs Department 2. Comptroller-General's Department 3. Bank of Thailand, Monthly Bulletin, Table 24 Note: Figures in parentheses are average shares in respective aggreg * Long-term External Debt and Debt service Obligations 40
Table 2 Tax Revenue Structure : Central Government (period average)

|----------------------------------------------------------<br> <br>||(Percent)<br>__--------<br> <br>|
|---|---|---|
|Rate of Change<br>1971-74|1975-85|<br>1986-89|
|TAXATION<br>22.00|<br>13.80|<br>20.49|
|Income taxes:-<br>'<br>23.19|<br>20.11|<br>19.30|
|(13.55)|<br>(20.51)|(21.62)|
|Personal<br>12.72|:<br>22.99|:<br>10.65|
|(7.36)|<br>(9.72)|<br>(10.63)|
|Corporation<br>36.57<br>|<br>17.70<br>|<br>**27.82**<br>|
|(6.18)|:(10.79)|(10.93)|
|Indirect Taxes:-<br>21.84|<br>12.58|<br>21.04|
|* (85.28)|(79.49)|(78.38)|
|Import duties<br>12.04<br>|<br>13.24<br>|:<br>24.44<br>|
|* (27.75)|(22.66)|:(22.39)|
|Business taxes<br>22.60|<br>13.53<br>|<br>24.43<br>|
|(21.13)|<br>(21.74)|:(20.16)|
|Selective sales taxes<br>*****<br>22.31<br>* (19.60)|<br>17.22<br> :(23.42)|<br>18.14<br>(27.55)|

Sources: 1. Customs Department 2. Comptroller-General's Department 3. Bank of Thailand, Monthly Bullentin, Table 23 Note: Figures in parentheses are average shares in respective aggregate 41
t. .' !\pt. i t. F>x3tic if les tnd iN q XBuo;.arz.

ixe,\elni? Flastic it o f **Pu1** i . _E\:pe_ lidtulI I __________________________ Sf,ort rin lon, ru, u .r, * m,.t .c mts I 0.31 (0.54 l 1 + .V;.b,1 . lieI' d ; turz (aG) 0. 5 4 ( .01) Tax Buoyancy (with respect to) - 0mo -r , its 1.44 (personral inicome) I n.£r 3'it _ie_ 0.88 (import value) r.tluSi ,..>S Taxes 1 .1 0 (domestic absorptiorJ, .1~., <Th\ (s 1.33 (domestic absorption) S lur1't e; Cals u1lated fcom Tables 23 and 24, BOT, Monthly Bulletin.

42
Table 4

# Deficit Ceiling

|||||||||(Mill|inna<br>|ofBath)|
|---|---|---|---|---|---|---|---|---|---|---|
|Fiscal|<br>Ce|Ca|Re|Ra|(Ce-Re)|(Ca-Ra)|<br>PR|Cm|Ce/Cm|Ca/Cm|
|Year|_1/|2/|_1/|_2/|------|------|(Principa|l (Maximum|<br>(%)|(S)|
||(Expe|nditure)|(Reve|nue)|Ce|Ca|Repayment)|Expend.)|||
|1970|27,300.0|23,617.0|19,020.0|17,909.0|0.303|0.242|-|-|-|-|
|1971|28,645.0|26,978.0|21,800.0|19,088.0|0.239|0.292|-|-|-|-|
|1972|29,000.0|28,905.0|21,700.0|21,165.0|0.252|0.268|-|-|-|-|
|1973|<br>31,600.0|<br>30,937.0|<br>23,300.0|<br>25,344.0|<br>0.263|<br>0.181|<br>716.5|<br>29,698.2|106.40|104.17|
|1974|<br>36,000.0|<br>34,629.0|<br>26,520.0|<br>37,921.0|<br>0.263|(0.095|) 1,511.6|<br>34,359.3|104.78|100.78|
|1975|<br>48,000.0|<br>43,541.0|<br>38,500.0|<br>38,229.0|<br>0.198|<br>0.122|<br>2,357.2|<br>50,010.8|<br>95.98|<br>87.06|
|1976|<br>62,650.0|<br>53,686.0|<br>48,675.0|<br>42,731.0|<br>0.223|<br>0.204|<br>3,244.1|<br>63,439.0|<br>98.76|<br>84.63|
|1977|<br>68,790.0|<br>63,470.0|<br>50,470.0|<br>51,710.0|<br>0.266|<br>0.185|<br>1,414.3|<br>64,218.9|107.12|<br>98.83|
|1978|<br>81,000.0|<br>74,716.0|<br>62,000.0|<br>62,022.0|<br>0.235|<br>0.170|<br>4,124.8|<br>80,799.8|100.25|<br>92.47|
|1979|<br>92,000.0|<br>86,157.0|<br>72,000.0|<br>75,109.0|<br>0.217|<br>0.128|<br>2,125.6|<br>91.700.5|100.3a|<br>93.95|
|1980|114,556.5|114,287.0|<br>92,680.0|<br>92,147.0|<br>0.191|<br>0.194|<br>3,168.5|118,384.8|<br>96.77|<br>96.54|
|1981|140,000.0|129,941.0|120,000.0|110,329.0|<br>0.143|<br>0.151|<br>3,403.1|152,722.5|<br>91.67|<br>85.08|
|1982|161,000.0|152,168.0|140,000.0|113,810.0|<br>0,130|<br>0.252|<br>4,578.1|178,662.5|<br>90.11|<br>85.17|
|1983|177,000.0|165,100.0|151,000.0|136,448.0|<br>0.147|<br>0.174|<br>6,196.7|193,707.4|<br>91.37|<br>85.23|
|1984|192,000.0|177,402.0|160,000.0|147,847.0|<br>0.107|<br>0.167|<br>8,412.7|206,730.2|<br>92,87|<br>85.81|
|1985|213,000.0|197,468.0|178,000.0|159,196.0|<br>0.164|<br>0.194|13,216.6|233,073.3|<br>91.39|<br>84.72|
|1986|21,000.0|204,016.0|185,000.0|166,254.0|<br>0.151|<br>0.185|13,833.2|242,316.6|<br>89.96|<br>84.19|
|1987|22-,500.0|207,817.0|185,500.0|192,484.0|<br>0.185|<br>0.074|15,500.0|244,275.0|<br>93.13|<br>85.08|
|1988|243,500.0|220,655.0|199,500.0|245,646.0|<br>0.181|(0.113|) 17,357.6|263,261.1|<br>92.49|<br>83.82|

-----------------------------------------------------------------

__----------__------------------------Source _l/ Estimated level (Thailand's Budget in Brief) 2/ Actual level (Monthiv Dulletin, BoT) Note 1* According to the hudgetary law, government deficit must not exceed 20X of the estimated expenditure plus 80X of the principal repayments of that vear.

C aovernment expenditure R Rovernment revenue a actual e estimated or planned _Cm_ r maximum or ceiling expenditure (1.25*Re * 0.8PR) 4 3
Table 5

|D<br>Accor|ecompositi<br>Non-fi<br>ding<br>to <br>|on<br>of t<br>nancial<br> <br>Changes<br>i<br>(Ratio to|he Changes<br>Public Sec<br>n Economic<br>CDP,1971-|in Conso<br>tor Deflo<br> **and**<br>Poli<br>1988)|lidated<br>its,<br>cv Determ|inants|||
|---|---|---|---|---|---|---|---|---|
|1971|1972|1973|1974|1975|1976|1977|1978|1979|
|1. Changes .nue to Domestic Vari|ables||||||||
|Real exchange rate<br>0.018|0.009|-0.025|-0.023|-0.014|-0.018|-0.015|-0.013|-0.008|
|Inflationrate<br>0.005|0.045|0.109|0.135|0.027|0.017|0.029|0.025|0.028|
|2. Changes Due to Foreign Varia|ble||||||||
|Term of trade<br>0.095|0.064|-0.075|0.001|0.051|0.063|0.064|0.052|0.042|
|3. Changes Due to Policy Variab|le||||||||
|Taxation rate<br>0.017|0.031|0.037|-0.071|0.002|0.010|-0.023|-0.022|-0.040|
|SUMOF CHCS. DUE TO<br>0.135|0.148|0.046|0.041|0.066|0.073|0.355|0.042|0.021|
|CHCS. DUE TO OTHER<br>-0.116|-0.140|-0.054|-0.080|-0.031|-0.049|-0.754|-0.021|-0.024|
|CHC. CONSOLIDATED<br>NF<br>0.020|0.008|-0.008|-0.039|0.036|0.024|0.001|u.021|-0.003|
|1980|1981|1982|1983|1984|1985|1986|1987|1988|
|1. Changes Due to Domestic Vari|ables||||||||
|Real exchange rate<br>-0.003|-0.005|0.002|0.003|0.003|0.005|0.004|0.003|0.001|
|Inflation rate<br>0.046|0.026|0.010|0.007|0.001|0.004|0.003|0.003|0.004|
|2. Changes Due to Foreign Varia|ble||||||||
|Term of trade<br>0.041|0.047|0.051|0.041|0.040|0.042|0.033|0.029|0.022|
|3. Changes Due to Policy Variab|le||||||||
|Taxation rate<br>-0.040|-0.031|-0.021|-0.040|-0.035|-0.038|-0.032|-0.037|-0.041|
|SUM OF CHG5. DUE TO<br>0.044|0.037|0.042|0.011|0.009|0.013|0.008|-0.002|-0.015|
|CHGS. DUIE TO OTHEF<br>-0.012|-0.037|-0.022|-0.023|-0.017|0.006|-0.019|-0.026|-0.008|
|CHC. CONSOLIDATED<br>NF<br>0.033|0.000|0.020|-0.013|-0.007|0.019|-0.011|-0.028|-0.023|

44
# Table 6 Sensitivity of Consolidated Non-financial Public Sector Deficits to Change in Economic and Policy Determinants

|CHANGES IN ECONOMIC AND POLICY<br>DETERMINANTS<br>---------------------------------------------------------------------|SEMI-<br>ELASTICITY|CHANGES IN NFPS DEFICIT<br>(Percentage Point ofGDP)<br>__------__-|
|---|---|---|
|1. DOMESTIC VARIABLES|||
|PTN|-1.751|-0.071|
|INF|0.403|0.016|
|2. FOREIGN VARIABLE|||
|PXM|-2.805|-0.113|
|3.<br>POLICYVARIABLES|||
|TY<br>---------------------------------------------------------------|-6.841|-0.276<br>__------------__-|

Note: The estimations of all obtained values are based on the mean valJtes of the relevant variables.

45
Table 7 Financing Public Deficit

|||||||||(<br>---------------|Percent)|
|---|---|---|---|---|---|---|---|---|---|
|-------------------<br>|--------|---------------------------<br>|----<br>||||_<br>|_<br> <br>||
|Time||NDB|NFB|NOLT|UTCB|BOT|CB|GSB<br>|thers|
||||(X of|deficit)||(X of|net domes|tic borro|wings)|
|1970||75.0|<br>-1.3|<br>4.1|22.2|:<br>75.7|11.0|11.2|2.1|
|1971||75.4|<br>-0.8|<br>12.2|<br>13.3|<br>40.6|<br>43.4|15.7|0.4|
|1972||121.0|<br>-1.4|<br>0.2|-19.8|<br>14.2|<br>63.0|19.0|3.9|
|1973||87.6|<br>-0.2|<br>37.0|<br>-24.4|<br>21.2|<br>24.5|48.4|6.0|
|1974||62.5|<br>7.1|<br>-71.1|<br>101.6|<br>238.8|-64.5|-79.7|5.4|
|1975||41.8|<br>-2.6|<br>24.7|<br>36.2<br>|<br>-17.0<br>|<br>57.6|26.1|33.2|
|1976||69.0|<br>-0.6|<br>20.3|<br>11.3<br>|:<br>49.9<br>|<br>31.4|14.6|4.1|
|1977||88.4|<br>0.9|5.1|<br>5.6|:<br>57.5|<br>12.1|20.0|10.4|
|Avera|ge|77.6|<br>0.1|<br>4.1|<br>18.3|<br>60.1|<br>22.3|9.4|8.2|
|1978||109.3|<br>-4.9|<br>3.2|<br>-7.6|:<br>66.5|<br>15.8|8.7|9.1|
|1979<br>|<br>|98.0<br>|<br>-7.1|<br>1.6|<br>7.5<br>|<br>66.0<br>|<br>12.2|14.2|7.7|
|1980<br>|:<br>|100.0<br>|-4.7<br>|<br>7.8|<br>-3.2|:<br>48.9|23.2|20.2|7.7|
|1981|:|103.5|<br>-4.8|<br>0.6|0.7|<br>60.9|<br>28.9|7.6|2.6|
|1982||105.9|<br>1.9|<br>-6.5|<br>-1.3|<br>37.9|<br>31.5|11.5|19.1|
|1983||111.2|<br>4.1|<br>-17.1|<br>1.8<br>|<br>38.5<br>|<br>13.6|25.0|22.8|
|1984||108.1|<br>-2.2|<br>-7.1|<br>1.1|:<br>-9.2|65.3|24.9|18.9|
|1985||81.1|<br>36.4|<br>-15.7|<br>-1.8<br>|<br>35.9<br>|<br>2.2|26.5|35.5|
|1986||147.1|-18.9|<br>-23.3|<br>-4.9|:-11.8|49.4|46.9|15.5|
|1987||120.1|-36.9|<br>-3.8|<br>20.6<br>|<br>-80.4<br>|<br>103.0<br>|36.5|40.9|
|1988||79.9|<br>12.6|<br>-1.3|<br>8.9|:166.2|-34.0|-35.9|3.8|
|Avera|ge|105.8|<br>-2.2|<br>-5.6|<br>2.0|<br>38.1|<br>28.3|16.9|16.7|

So'. e : Computed from Bank of Thailand, Monthly Bulletin, Table 25 Note : NDB = Net Domestic Borrowings BOT = Bank of Thailand CB = Commercial Banks GSB = Government Saving Bank NFB = Net Foreign Borrowings NOLT = Net Other Liabilities of Treasury UTCB **=** Use of Treasury Cash Balances 46
Table 8 Tradable and Non-tradable Prices

|--------------------------------<br>Year|--------------------<br>PT|PN|PTN|PXN|PMN|
|---|---|---|---|---|---|
|--------------------------------|--------------------|||||
|1970|42.6|44.4|96.1|75.3|54.8|
|1971|41.7|46.1|90.4|65.1|55.6|
|1972|44.7|48.1|93.0|68.7|56.2|
|1973|55.0|51.1|107.6|99.1|61.7|
|1974|66.5|60.5|109.9|115.5|84.3|
|197;.|68.2|65.1|104.9|101.3|87.6|
|1976|71.9|65.3|109.1|97.4|_91.2_|
|1977|_'.8.2_|69.9|109.0|93.7|92.4|
|1978|83.6|76.1|109.9|93.1|'l.5|
|1979|90.0|85.5|105.2|99.0|94.2|
|1980|100.0|100.0|100.0|100.0|100.0|
|1981|109.4|105.8|103.4|97.3|111.7|
|1982|110.3|119.9|92.0|79.9|101.1|
|1983|113.6|125.7|90.4|77.3|91.0|
|1984|113.2|126.3|89.6|76.2|91.3|
|1985|112.5|132.0|85.2|74.9|95.7|
|1986|116.6|133.0|87.7|77.4|89.3|
|1987|122.0|138.6|88.0|79.3|91.3|
|1988|131.9|139.9|94.3|91.2|99.1|

----------------------------------------------------

Source: Computed from NESDB, Px and Pm from IFS.

- PT = Price of tradables PN =Price of non-tradables PTN = Real exchange rate

PXN = Relative prices of exportables to non-tradables PWMN =Relative prices of importables to non-tradables 4-
Table 9 Specifications of the Macroeconouctric Mot-,) for Thaiinnil Trade block: (1) Xnt = f 1Pxn(1-txa)*r](-1), _I'da, (4n+Q)l, HliS (-I)_ (2) Xi = fN 0$1fi/Hi, jqi/Y1(-1), I.IISV(-i) (3) Xs = f( Yw*e, 1)80-87, LHSV(-I)<sup>)</sup> (4) MIn = fN Pma(l+t.a)*e, Pda, Y/Y*, N*, IiS(I (5) Mi = f( Pnmi(l+ti)*e, Pdi, Y/I*, Y* _(G)_ Mo = f( Pmo(l+to)*e/Pdo,<sup>Y/Y*,</sup><sup>_Y*,_n7.37480</sup> (7) Ms = N X4M, 1)7384, D7980 Aggrgja.l demand tu!d sitply: (8) Qa = rK Ki, Nn, Mo, 0727987 (9) Qi = f( Ki, Ni, Mo ) (10) ('p f( Y-(l'/Pcl), LiISV(-I) (11) Ip = 1 Kp(-l), Y, ln[((ACAp+AL+F)/rd]t (12) T f( M, A, LIISV(-I) Price Block: (13) 6 In(Pd) = f( AIn(PM), AIn(Pxn),<sup>In(E)</sup> (14) Pda = f( Pd (15) Pdi = f( Pd (16) PM = f( Pma(l+ta)*e,<sup>Pmi(l+t.i)*e,</sup> 'mo(l+to)*e

# Financial Block:

Interest Rate and Capital<sup>Flows:</sup> (17) Rd = r( L,<sup>Rf, Rc, .IISV(-l)</sup> (18) F = f( Rd, Rf, e, Pfi,<sup>Pdi, Qw</sup> (19) Hf = f( F, CAD, e, D87 Private Portfolio: (20) Z/Y*Pd = f( Rz, Aln(Pd),<sup>l.HSV(-t)</sup> ) (21) DD/Y*Pd = f( Rz, 6ln(Pd),<sup>LHSV(-I)</sup> (22) TD/7 = f( Rt, Rs, Rg,<sup>LIISV(-l)</sup> (23) SD/Z = f( Rt, Rs, Rg, LIISV(-]) Bank Portfolio: (21) Fl = f( 1), L, Rf, Rdisi) (25) l, = f( 1), Rd, Fl (26) GPb = f( 1), Rd ) (27) Fa = f( D, Rui-Rd (2A) (Oh f( n, Rd, Rni 48
**I deint** itieR:

(29) P = III) + 14s * lif + Ilb (30) D) = DI) + I'D + SD (31) I **CAp =** B - _CAI)_ - On (32) GBp = 7 - 1D - Sl) (33) iIb = L + GCb + Fn * _CAI)_<sup>-nFl</sup> - of, (34) X - xh + Xi (351) XN - (Xn * Pxa) + (Xi * Pxi) (36) M **_Mnti_** Mi + Mo (37) MN = (Ma * Pma) + (Mi * Pmi)<sup>+(Mo*Pmo)</sup> (3B) TBP **a** MN - XN (39) CAD = TBn + **M, - X-** Tr (40) A = Cp + Ip + (Cg / I'i) +<sup>**_(Ig_**/ P(d)</sup> (41) Y = A **+** X + (Xs / **Pxs)**<sup>-M-</sup> **(MR** / Pms) + Dig **(42)** E - **In [** (A + (XN / Pd))<sup>/(Qn+Qi+</sup><sup>**Qp)**</sup> (43) Dg - Cg + Ig - T (44) &Bf - Dg - AGBp - 1AGlb - 6Ig - **GSn** + **o0** - (45) Pdh expf[1n(Pd)-nl*ln(Pdn)-n2*1n(Pdi))/(1-aI-a2)J 49
Table 10 Root Mean Square Errors (Ratio to mean *alues)

||1981-|1986|1976|-<br>1980|
|---|---|---|---|---|
|Variables|||||
||Dynamic|Static|Dynamic|Static|
|Xa<br>|0.1089<br>|0.0986<br>|0.3906<br>|0.1326<br>|
|Xi|0.1978|0.1175|0.2510|0.1443|
|Xs|0.0948|0.1041|0.1616|0.1265|
|Ma|0.1146|0.0837|0.1379|0.0977|
|Mi|0.1341|0.1155|0.1353|0.0858|
|Mo|0.2428|0.1997|0.2955|0.1282|
|Ms|0.3354|0.2704|0.8198|0.2344|
|Qa<br>|0.1561<br>|0.1272<br>|0.1947<br>|0.1051<br>|
|Qi<br>|0.0855<br>|0.0759<br>|0.1037<br>|0.0417<br>|
|Cp|0.0241|0.0206|0.0461|0.0209|
|Ip|0.3626|0.3359|0.3384|0.2552|
|T|0.2467|0.0966|0.2330|0.0508|
|Pd|0.0272|0.0254|0.0479|0.0201|
|Pda|0.0555<br>|0.0569<br>|0.0658<br>|0.0482<br>|
|Pdi|0.0469|0.0395|0.0805|0.0365|
|PM<br>|0.0151<br>|0.0151<br>|0.0078<br>|0.0078<br>|
|Rd<br>|0.0246<br>|0.0232<br>|0.0352<br>|0.0322<br>|
|F|0.1584|0.1512|0.1853|0.1786|
|Hf|0.1089|0.1179|0.1333|0.1482|
|Z|0.0511|0.0557|0.1841|0.0770|
|DD|0.1225|0.1412|0.1162|0.1075|
|TD|0.0576|0.0583|0.1592|0.0729|
|SD<br>|0.1123<br>|0.1045<br>|0.3309<br>|0.1236<br>|
|Fl|0.1835<br>|0.1863<br>|0.3400<br>|0.3469<br>|
|L|0.0657|0.0658|0.1149|0.0548|
|GBb|0.0797|0.0888|0.2093|0.1494|
|Fa|0.1051|0.1114|0.1599|0.1503|
|CAb|0.1030|0.0995|0.0923|0.1261|
|B|0.0869|0.0878|0.2183|0.2401|
|D|0.0561|0.0588|0.1681|0.0721|
|CAp|0.1168|0.1173|0.2728|0.2897|
|GBp|0.0970|0.1213|0.3689<br>|0.0961<br>|
|Hb|0.2315|0.2311|0.6184|0.6416|
|X|0.1198|0.0874|0.3439|0.1148|
|XN|0.1256|0.0891|0.4042|0.1144|
|M|0.1554|0.1292|0.1834|0.0949|
|MN|0.1529|0.1254|0.2001|0.0876|
|TBD|0.3538|0.4010|0.4294|0.2083|
|CAD|0.6391|0.6483|0.1967|0.2750|
|Y|0.0509|0.0427|0.0875|0.0435|
|Dg|0.4267|0.1671|0.4462|0.0973|
|<br>Pdh|0.02""|0.0302|0.0475|0.0448|
Table 11 Theil's Inequality Coefficients and their Compositions 1981 - 1986 (Dynamic)

|VariableB|T|B|V|C|
|---|---|---|---|---|
|Xa<br>|0.0522<br>|0.3846|0.0000|0.6154|
|Xi<br>|0.0885<br>|0.5569<br>|0.4210|0.0221|
|Xs<br>|0.0465<br>|0.0014<br>|0.0165<br>|0.9821|
|Ya<br>|0.0536<br>|0.7323<br>|0.1793<br>|0.0884<br>|
|Mi|0.0627<br>|0.8964|0.0009|0.1026|
|Mo|0.1085|0.9293|0.0333|0.0373|
|Ms<br>|0.1395<br>|0.7813|0.1010|0.1177|
|Qa<br>|0.0724<br>|0.9717<br>|0.0183<br>|0.0100<br>|
|Qi<br>|0.0409<br>|0.7141<br>|0.1473<br>|0.1386<br>|
|Cp<br>|0.0119|0.9297|0.0426|0.0276|
|ip|0.1532|0.9841|0.0060|0.0099|
|T|0.1094|0.758¶1<br> <br>|n.'216<br>|0.0195|
|Pd<br>|0.016<br>|0.009?<br>1<br>|<br>13:15<br>|0.5142|
|Pda|0.0275|0.1399|(.(008|0.8593|
|Pdi|0.0234|0.0000|0.4431|0.5563|
|I'M|to.0076|0.0003|0.1453<br>|0.3544|
|Rd<br>|0.0122<br>|0.1319<br>|n0.s;Si<br>|0. '930|
|F<br>|0.0746<br>|0.0125<br>|ii.027:3|0.9602|
|Hf|0.0546|0.2266||**0.**IX18<br>64R6|
|z|0.0239|0.8173|0.0038|0.1789|
|DD|0.0582<br>|0.4573|1<br>z.|I. :,1Ol|
|TD<br>|0.0272<br>|0.7744|0.0800|0.1456|
|SD|0.0504|0.1345|0.425(i|o.1398|
|L|0.0894|0.6023|0.0014|0.3963|
|GBb|0.0311|0.3140|0.0069|0.6790|
|Fa<br>|0.0370<br>|0.1182|0.0006|0.8813|
|Fl<br>|0.0524<br>|0.0242<br>|0.6888<br>|0.2870|
|CAb|0.0498|0.0022|0.2016|0.7962|
|B|0.0441|0.3179|0.0024|0.6797|
|D<br>|0.0263<br>|0.8120<br>|0.0216|0.1665|
|CAp<br>|0.0600<br>|0.2909<br>|0.0463<br>|0.6628|
|GBp<br>|0.0449|0.0064|0.6328|0.3608|
|Hb|0.1141|0.0523|0.4196|0.5281|
|X|0.0563|0.6315|0.1080|0.2605|
|XN|070588|0.6400|0.1363|0.2237|
|M<br>|0.0719<br>|0.9536|0.0104|0.0360|
|MN|0.0709|0.9599|0.0079|0.0322|
|TBD|0.1430|0.7277|0.0215|0.2508|
|CAD<br>|0.2215<br>|0.8831|0.0037|0.1132|
|Y<br>|0.0247<br>|0.9057<br>|0.0008|0.0935|
|Dg|0.2578|0.7589|0.0031|0.2381|
|Pdh|0.0140|0.2666|0.0132|_!i.i?02_|

Not I '1 wil ie-equality coefficients. B= Fraction of error due to I3ias. It , ;, I ^I. cticde to Different Variation. C Fraction of error due to Different Covariation.
Table 12 Simulated Effects of Money Financed Public Doficit (Percentage Deviation from Baseline Solutiorn)

|Variable|<br>1981|1982|1983|1984|<br>1985|<br>1986|
|---|---|---|---|---|---|---|
|Xa|0.72|1.18|1.45|1.60|<br>1.61|<br>1.52|
|Xi<br>|0.52<br>|0.77<br>|0.87<br>|0.94<br>|1.00<br>|<br>1.14<br>|
|Xs|0.00|0.00|0.00|0.00|0.00|0.00|
|Ma|0.66|0.96|1.00|1.10|<br>1.15|1.07|
|Mi|0.98|1.19|1.15|1.28|1.32|<br>1.19|
|Mc,|-79|2.16|2.06|2.29|2.33|2.07|
|Ms|2.17|3.01|3.10|3.39|3.48|3.06|
|Qn|1.24|1.50|1.42|1.59|<br>1.61|1.43|
|Qi|0.70|0.85|0.81|0.90|0.91|0.81|
|Cp|0.22|0.34|0.35|0.35|0.33|0.27|
|Ip|0.89|1.06|1.01|1.11|1.13|1.00|
|T|0.88|1.57|1.99|2.33|2.55|2.5P|
|Pd|0.01|0.03|0.06|_0.0b_|0.11|0.12|
|Pda|0.01|0.04|0.06|0.09|0.12|0.14|
|Pdi|0.01|0.04|0.06|0.09|0.12|0.14|
|PM|0.00|0.00|0.00|0.00|0.00|0.00|
|Rd|-0.01|-0.02|-0.02|-0.02|-0.03|-0.02|
|F|-0.04|-0.08|-0.08|-0.08|-0.08|-0.06|
|Hf|-1.04|-1.35|-1.65|-1.20|-1.19|-0.53|
|7|0.53|0.68|0.62|0.68|0.68|0.59|
|DD|0.53|0.67|0.61|0.69|0.70|0.65|
|TD|0.54|0.66|0.58|0.61|0.59|0.53|
|SD|0.54|0.66|0.58|0.61|0.60|0.55|
|Fl|0.03|0.09|0.20|0.21|0.24|0.24|
|L|0.39|0.59|0.55|0.58|0.60|0.48|
|GBb|0.60|0.73|0.59|0.64|0.61|0.52|
|Fa|0.39|0.54|0.51|0.54|0.56|0.51|
|CAb|0.49|0.63|0.53|0.58|0.57|0.48|
|B|4.39|5.04|5.18|4.84|5.27|4.32|
|D|0.54|0.66|0.58|0.61|0.60|0.54|
|CAp|5.11|6.10|6.45|6.54|7.31|6.01|
|GBp|0.09|1.08|1.69|2.41|2.74|1.75|
|HIb|-0.37|1.37|1.14|0.69|1.69|-0.33|
|X|0.65|1.06|1.27|1.38|1.38|1.35|
|XN|0.65|1.04|1.26|1.36|1.34|1.32|
|M|1.21|1.45|1.40|1.54|1.55|1.40|
|MN|1.22|1.47|1.40|1.52|1.54|1.30|
|TBD|2.16|2.32|1.65|1.91|2.13|1.03|
|CAI)|3.02|3.69|2.98|3.36|3.94|11.74|
|y|0.48|0.68|0.63|0.70|0.73|0.57|
|Dg|4.28|2.52|1.68|0.38|-0.21|-4.44|
|<br>Pdh|0.01|0.03|0.05|0.07|0 09|0.11|

52
Table 13 Simulated Effects of Tax Financed Public Deficit (Percentage Deviation from Baseline Solution)

|Variable|<br>1981|1982|1983|1984|1985|1986|
|---|---|---|---|---|---|---|
|Xa|0.41|0.40|0.19|-0.17|-0.55|-0.92|
|Xi|0.28|0.20|0.08|-0.15|-0.41|-0.64|
|Xs|0.00|0.00|0.00|0.00|0.00|0.00|
|Ma|0.39|0.28|0.03|-0.26|-0.53|-0.80|
|Mi|0.58|0.28|-0.06|-0.39|-0.69|-0.99|
|No|1.06|0.50|-0.12|-0.73|-1.26|-1.80|
|Ms|1.32|0.86|0.07|-0.75|-1.50|-2.34|
|Qa|0.73|0.35|-0.08|-0.51|-0.88|-1.25|
|Qi|0.42|0.20|-0.05|-0.29|-0.50|-0.72|
|Cp|-0.10|-0.40|-0.73|-1.03|-1.27|-1.41|
|Ip|0.47|0.23|-0.06|-0.33|-0.58|-0.83|
|T|3.74|5.37|5.81|5.70|5.46|4.60|
|Pd|0.01|0.02|0.02|0.01|0.00|-0.02|
|Pda|0.01|0.02|0.02|0.01|0.00|-0.02|
|Pdi|0.01|0.02|0.02|0.01|0.00|-0.02|
|PM|0.00|0.00|0.00|0.00|0.00|0.00|
|Rd|-0.01|-0.01|0.00|0.01|0.01|0.02|
|F|-0.03|-0.03|0.00|0.03|0.05|0.08|
|Ht|-0.63|-0.27|0.29|0.59|0.78|0.71|
|Z|0.31|0.15|-0.07|-0.25|-0.41|-0.57|
|DD|0.31|0.15|-0.06|-0.23|-0.38|-0.54|
|TD|0.31|0.12|-0.09|<br>-0.26|-0.42|<br>-0.56|
|SD|0.31|0.12|-0.08|-0.25|-0.41|-0.56|
|Fl|0.02|0.02|-0.03|-0.08|-0.15|<br>-0.29|
|L|0.25|0.15|-0.08|-0.23|-0.38|<br>-0.58|
|GBb|0.35|0.14|-0.09|-0.26|-0.42|<br>-0.54|
|Fa|0.23|0.10|-0.07|-0.22|-0.39|<br>-0.52|
|CAb|0.28|0.12|-0.08|-0.24|-0.39|<br>-0.50|
|B|-0.42|0.07|0.11|0.25|0.38|0.22|
|D|0.31|0.12|-0.08|-0.26|-0.41|<br>-0.56|
|CAp|-0.55|0.06|0.16|0.42|0.67|0.51|
|GBp|0.36|0.84|0.40|0.03|-0.21|<br>-0.86|
|Hb|0.15|1.02|-0.08|-0.12|-0.33|<br>-0.95|
|X|0.37|0.34|0.15|-0.16|<br>-0.50|<br>-0.80|
|XN|0.37|0.33|0.15|-0.16|-0.49|<br>-0.78|
|N|0.72|0.35|-0.07|<br>-0.47|<br>-0.82|<br>-1.18|
|MK|0.72|0.35|-0.07|-0.47|<br>-0.81|<br>-1.09|
|TBD|1.31|0.38|-0.48|-1.19|<br>-1.73|<br>-4.62|
|CAD|1.84|0.72|-0.53|<br>-1.67|<br>-2.58|<br>-15.66|
|Y|0.31|0.19|-0.04|<br>-0.22|<br>-0.37|<br>-0.57|
|Dg|-0.96|-5.41|-10.69|<br>-12.99|<br>-10.91|<br>-21.35|
|<br>Pdh|0.01|0.02|0.01|0.01|0.00|<br>-0.02|

53
Tnalo II Simtlate(d FffPctq of Bond Finan ed P'ulblic **Ile** fic it 1 P(rrentit ago e **i Ft in** f trom lknsel i no Sq **Iiit** i **()**

|V'arinhIo|I981|1982|1983|1981|1985|1986|
|---|---|---|---|---|---|---|
|Xn|0.68|1.11|1.42|1.55|LS(|1.18|
|Xi|0.49|0.76|0. 95|0.o95|<br>1.02|11 5|
|X-;|0.00|0.00|0.00|0.0(1|<br>0.0o|0.00|
|Ma|0.63|0.92|0.92|1.04|1.07|0.99|
|M)|0.93|1.14|1.01|1.2i|1.23|1.09|
|**MNJ**|1.70|2.08|1.87|2.17|2.18|1.91|
|Ms|2.05|2.81|3.(0|3.2i|3.33|2.98|
|Qn|1.18|1.41|1.29|1.50|1.51|1.32|
|Qi|0.fi7|0.82|0.73|0.85|0.85|0.75|
|cp|0.21|0.33|0.31|0.32|0.31|0.25|
|Ip|0.74|0.86|0.7.1|0.92|O.87|0.78|
|T|0.84|1.50|1.86|2.19|2.39|2.41|
|Pd|0.01|0.03|0.05|0.07|0.10|0.11|
|Pda|0.01|0.03|0.06|0.08|0.10|0.12|
|Pdi|0.01|0.03|0.06|0.08|0.11|0.13|
|PM|0.00|0.00|0.00|0.00|0.00|0.00|
|Rd|-0.01|0.00|0.02|0.00|0.01|0.01|
|F|-0.02|0.01|0.06|0.01|0.05|0.05|
|Hf|-0.98|-1.26|-1.35|-1.06|-1.03|-0.42|
|_7._|0.50|0.66|0.60|0.68|0.67|0.57|
|DL)|0.51|0.65|0.58|0.67|0.66f|0.60|
|TO|0.29|-0.415|-0.99|-0.26|-0.93|-0.61|
|SI)|0.52|0.65|0.60|0.65|0.62|0.57|
|Fl|0.02|-0.02|-0.17|0.01|-(.16|-0.11|
|L|0.23|-0.15|-0.47|0.00|-0.41|-0.21|
|GBb|0.39|-0.19|-0.56|-0.04|-0.51|-0.19|
|Fa|0.25|-0.14|-0.48|-0.03|-0.4fi|-0.18|
|CAb|0.32|-0.17|-0.50|-0.03|-0.47|-0.18|
|P|-0.82|-0.76|-0.89|-0.21|-0.49|-0.60|
|It|0.35|-0.18|-0.55|-0.04|-0.5()|<br>-0.20|
|CPTl|-1.03|-0.91|-0.98|-0.28|-0.54|-0.80|
|_Gip_|_|_|_|_|_|_|
|lih|-0.52|-0.09|0.03|0.46|0.72|-0.40|
|X|0.62|1.03|1.27|1.35|1.36|1.33|
|XN|0.62|1.01|1.26|1.33|1.31|1.31|
|M|1.15|1.40|1.27|1.46|1.45|1.29|
|MN|1.16|1.41|1.27|1.44|1.44|1.20|
|TBL|2.06|2.21|1.28|1.69|1.8R|-0.12|
|CAI)|2.88|3.50|2.52|3.06|3.51|9.49|
|Y|0.46|0.62|0.5f6|0.67|0.68|0.54|
|Dg|44.36|2.67|2.09|0.94|0.38|-2.98|
|<br>Pdh|0.01|0.03|0.05|0.06|0.08|0.10|