FISIM at constant prices

1. FISIM at constant prices ANNEMULKAY National Bank of Belgium

2. Handbook on prices and volume measures in national accounts • No directly observable price or quantity representative of FISIM output • Methods for measuring FISIM at constant prices have to be based on conventions, just as the methods for measuring FISIM in current prices • Two approaches to deflate FISIM, considered both as B method • Output indicator method • Application of base period margins on stocks re-valued to base period prices

3. Base period margins method • Method described in the Council regulation 448/98 • Adopted in Commission regulation 1889/2002 as the method for calculation of FISIM at constant prices • The evolution of FISIM at current prices depends of the change in the two components of the calculation: • the volume component : the stocks of loans and deposits • the price component : represented by the difference between the reference rate and the effective rate of interest • Formula for FISIM at constant prices • (FISIM / Price index) X (Base period margin / Effective margin) • (Stocks/Price index) X Base period margin

4. Base period margins method (continued) • The formula only includes the evolution of stocks deflated by a general price index • Stocks are deflated to remove the influence of price changes on stocks which otherwise feed through into volume measure • Choice of deflator: must account for the change in the "price of money" • best approximation: GDP deflator, deflator of domestic demand, overall CPI Two comments • Estimation of GDP deflator or deflator of domestic demand are implied deflators, including the deflator for financial intermediation. • Another price element is missing: the effect of appreciation/depreciation of foreign currencies on stocks (Luxembourg case).

5. Example of calculation : FISIM at constant prices for 1999 • Two steps calculation: • calculation of base year margins • application of the margins to stocks deflated by price index • Data required for the calculation of margins: • Stocks of base year, by counterpart sector • Accrued interest of base year, by counterpart sector • Internal and external reference rates of base year • Data required for calculations of stocks at constant prices • Stocks for the year 1999, by counterpart sector • Deflator for domestic final demand for the year 1999 (2000=100)

6. Calculation of margins for loans

7. Calculation of FISIM at constant prices on loans

8. Results 1995-2002 • GDP effect of allocating FISIM at constant prices • Average 1995-2002: 1,3 % • Volatility 1995-2002: 3.4 % • Effect on GDP growth in volume: quasi nil • pm: GDP effect of allocating FISIM at current prices • Average 1995-2002: 1,3 % • Volatility 1995-2002: 18.1 % • Effect on GDP growth: variating from -0.5 % to +0,2 %

9. Volatility and the volume effect • Effect of FISIM allocation on the growth of GDP at constant prices illustrates the fact that the volatility at the level of GDP at current prices (18,1 %) is more due to changes in prices than changes in volumes (stocks). • The same conclusion can be drawn from the analysis of • index of volatility of stocks of loans and deposits • index of volatility of effective margins

10. Effect of appreciation/depreciation of foreign currencies on stocks • Stocks in foreign currencies should/must be adjusted for appreciation/depreciation effects • Stocks (t) = Stocks (t-1) + financial transactions + revaluation effects + other change in volume • An adjustment is made on stocks to exclude revaluation effects: Stocks base year + cumulated "financial transactions" + cumulated "other changes in volume" = Adjusted stocks for revaluation effect • The stocks adjusted is then deflated by a general price index

11. Example for 1999:calculation of FISIM at constant prices on loans

12. FISIM at constant prices adjusted for revaluation effect