Working Papers, Konjunkturinstitutet - National Institute of Economic Research
Börje Kragh and Aleksander Markowski
KOFI - A Macromodel of the Swedish Financial Markets
The portfolio balance approach, on which KOFI is
based, as well as its formal structure, has been described in an earlier
Working Paper. The purpose of the present paper is to place the model in
its institutional context and to illustrate its properties by simulations.
Furthermore, previous work with Swedish and foreign financial models has
shown that the statistical input has been a bottleneck hampering full
exploitation of the portfolio balance approach. In order to widen the
bottleneck as far as possible, extensive work has been undertaken in order
to supply KOFI with relevant unpublished statistics.
The number of
sectors in KOFI is less than in the Swedish financial accounts, but larger
than in similar foreign models, and thus requires a relatively large volume
of statistics. That volume is manifold as data are collected on a yearly as
well as a half-yearly and quarterly basis. To link up with KOSMOS - which
is a semi-annual model - yearly statistics had to be transformed into
half-yearly data. Another comlication has been frequent incompatibility
between the data from Statistics Sweden and from other sources. The
statistical work has focused on capital markets and foreign exchange
markets i.e. on the areas which represent the core of a financial model.
The selection of sectors and of the variables in the sector
portfolios has been made with regarded to their importance in simulations
of financial macroprocesses. In practice the handling of the model has
required that - compared to the financial accounts - a number of items are
excluded because they are relatively small, relatively constant or
difficult to interpret. To the latter category belong the residuals ("other
assets and liabilities") that appear on both the debit and the credit side
of the balance sheets of the portfolios.
The accounting framework
of the model is shown in section 2. Section 3.1 contains an overview of the
development in the Swedish financial markets. As a starting point is used a
table of the changes of the portfolio of the total economy distributed
between the various components: money, certificates, bonds and loans. This
gives an idea about the structural changes in later years caused
particularly by deregulation. Long run changes in supply are otherwise not
so easily revealed in an analysis which centers on the demand behaviour of
individual sectors. As further background material, the section contains
tables of historical changes of demand and supply in the markets for bonds
and certificates. These tables are derived from KOFI sector balances. Such
tables are of vital importance for the interpretation of the simulations.
Section 3.2-5 deals with various institutional aspects of KOFI`s
sectors that are relevant for their modelling. Subsections 3.2 and 3.3 give
brief accounts of the borrowing behaviour of mortgage institutions and of
Central Government. Subsection 3.4 raises the question whether the model
should distinguish or not between private insurance companies and the
National Pension Fund. It appears there are good reasons for aggregating
the two subsectors.
The design of the "residual sector" of the
model is described in subsection 3.5. The residual sector contains
households, non-financial enterprises, local authorities, investment
companies and finance companies. There are arguments both for and against
having households and non-financial enterprises in a common sector. Some
problems concerning the modelling of the foreign sector are treated in
In section 4 certain formal aspects of KOFI are
discussed as well as the econometric properties of the model. The latter
concerns the determination of the long and the short term rates of
interest, the exchange rate and the portfolio choice of the various actors.
(These relationships are updated versions of those which have been more
extensively described in the report referred to in footnote 1).
Section 5 contains four simulations undertaken with KOFI. They concern the
effects of respectively, a change of the strategy of government borrowing,
an increase of the domestic short term rate, an increase of the foreign
interest rate and, finally, an increase of the budget deficit. The
simulations are desribed in the form of deviations from a given basic
scenario and limited to developments within the financial markets. The
developments are registered as changes of the balance sheets of the various
sectors. The emphasis is mainly on the processes generated by the
interaction between the sectors and not so much on the decision making by
each actor. A typical outcome of simulation i the volume of open market
operations required by the Central Bank to defend a targeted short-term
rate of interest. Other outcomes concern e.g. the paths followed over a
number of periods by lending and borrowing by various sectors.
Section 6 gives some indications of the future development and use of KOFI.
47 pages, June 1, 1998
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