A Flow of Funds Perspective on the Financial Crisis ― Money, Credit and Sectoral Balance Sheets

Flow-of-funds accounts are a component of the national accounts system reporting the financial transactions and balance sheets of the economy, classified by sectors and financial instruments. The biggest financial crisis in a lifetime has shown how important it is to have a deep knowledge of the financial balance sheets of the main sectors of the economy and the financial flows that take place between them. This type of information is essential for a proper understanding of the transmission of monetary and financial shocks through the economy, thereby complementing traditional monetary analysis centred on bank balance sheets.

This publication takes a flow-of-funds perspective of the financial crisis. The book highlights the ongoing efforts in the central bank and academic community to gain a deeper understanding of the implications of the financial crisis for monetary analysis and to develop empirical tools to extract regularities from the rich flow-of-funds dataset. The authors cover in this respect the full range of financial assets held by different sectors of the economy, including the balance sheet of financial intermediaries, bank leverage issues and their implications for the supply of credit to the economy, as well as the portfolio choices, savings behaviour and debt financing of households and non-financial corporations. Over time, this should enable monetary policy-makers to apply the new insights and instruments for a richer analysis of credit cycles and the transmission of monetary policy via flow-of-funds variables.

Bernhard Winkler is Senior Adviser in the Directorate Monetary Policy at the European Central Bank, responsible, inter alia, for flow-of-funds analysis and the co-ordination of financial projections as part of the quarterly macroeconomic projections exercises. He has published on issues relating to monetary and fiscal policy in a monetary union, monetary policy communication and the Stability and Growth Pact as well as on cross-checking and the flow of funds.

Ad van Riet is Senior Adviser in the Directorate General Economics at the European Central Bank, and Secretary of the ECB Occasional Paper Series. He has published on European money demand, fiscal policy and structural reforms.

Peter Bull joined the European Monetary Institute in Frankfurt as Head of Statistics in 1994, and remained as Director General Statistics when the European Central Bank was established in 1998. After retirement in autumn 2002 he has continued to work on related matters in the ECB and elsewhere. His more recent publications are in the field of national accounts and statistics.