Winkler et al (eds ) a flow of funds perspective on the financial crisis; vol i, money, credit and sectoral balance sheets (2014)

A Flow-of-Funds Perspective on the Financial Crisis


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A Flow-of-Funds Perspective on the Financial Crisis, Volume I: Money, Credit and
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Bernhard Winkler, Ad van Riet and Peter Bull (editors)
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Bernhard Winkler, Ad van Riet and Peter Bull (editors)

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A Flow-of-Funds
Perspective on the

Financial Crisis
Volume I: Money, Credit and Sectoral
Balance Sheets
Edited by

Bernhard Winkler
Senior Advisor, European Central Bank, Frankfurt am Main, Germany

Ad van Riet
Senior Advisor, European Central Bank, Frankfurt am Main, Germany

Peter Bull
Director General Statistics (retired), European Central Bank,
Frankfurt am Main, Germany


Editorial matter, selection and introduction
© Bernhard Winkler, Ad van Riet and Peter Bull on
behalf of the European Central Bank 2014
Foreword and remaining chapters
© Respective authors or their affiliations 2014
Softcover reprint of the hardcover 1st edition 2014 978-1-137-35297-2
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Contents

List of Figures

vii

List of Tables

x

Foreword by Peter Praet

xii

Notes on Editors

xv

Notes on Contributors
1

xvi

Introduction and Overview
Bernhard Winkler, Ad van Riet and Peter Bull

1

Part I Money, Credit and Liquidity in the
Flow of Funds
2

The Quantity Theory of Money Revisited
Carmelo Salleo

3

The Quantity Theory of Credit and Some of Its Policy
Implications
Richard A. Werner

4

Euro Area Money Demand and International Portfolio
Allocation: A Contribution to Assessing Risks to Price
Stability
Roberto A. De Santis, Carlo A. Favero and Barbara Roffia

13

22

46

5

Global Liquidity and Credit Booms
Claudio Borio, Robert N. McCauley and Patrick McGuire

6

Dual Liquidity Crises under the Gold Standard and in a

Monetary Union: A Financial Accounts Perspective
Ulrich Bindseil and Adalbert Winkler

125

Determinants and Consequences of Credit Tightening: An
Analysis of the United States and the Euro Area
Riccardo De Bonis, Luigi Infante and Francesco Patern`o

146

7

v

94


vi Contents

Part II Sectoral Analysis of the Flow of Funds
8

Financial Intermediary Balance Sheet Management
Tobias Adrian and Hyun Song Shin

9

Bank Leverage and the Credit Cycle in the Euro Area: A
Bayesian Semi-Parametric Approach

Celestino Gir´on and Silvia Mongelluzzo

10

11

12

13

Households’ Financial Portfolio Choices: A Comparison
between France and Germany (1978–2009)
Sanvi Avouyi-Dovi, Vladimir Borgy, Christian Pfister, Michael
Scharnagl and Franck S´edillot
Household Balance Sheets and Debt: An International
Country Study
Jacob Isaksen, Paul Lassenius Kramp, Louise
Funch Sørensen and Søren Vester Sørensen
Analysing Recent Developments in the Financing of Euro
Area Non-Financial Corporations
Laurent Maurin
Monetary Policy and the Flow of Funds in the Euro Area
Riccardo Bonci

Index

177

203

236

257

271
296
318


Figures
3.1
3.2
4.1
4.2

4.3

4.4
4.5
4.6
4.7
4.8
4.9
4.10
5.1
5.2
5.3
5.4
5.5
5B.1

5A.1
6.1
6.2
6.3
7.1
7.2

Standard fiscal policy funded via bond issuance
Bank-funded fiscal policy
Annual HICP inflation and M3 growth in the euro area
Euro area annual M3 velocity growth and net flows in
portfolio investment between non-monetary financial
institutions
Calza et al. money demand for the euro area: its
structural instability and four-step ahead out-of-sample
(from 2000 Q1) projections of real money growth
The DFR money demand model for the euro area
Projections of real money growth based on the DFR
money demand for the euro area
Expected real M3 growth: short, medium and long term
Excess liquidity measures and HICP inflation
The disequilibria in money demand and asset prices
before and after the euro area sovereign debt crisis
Out-of-sample projections of real money growth and
real GDP growth over the euro area sovereign debt crisis
Overall HICP inflation and HICP inflation excluding
food and energy
Global credit in dollars, euros and yen
Credit to the non-financial private sector in selected
European countries

Credit to the non-financial private sector in selected
advanced countries
Credit to the non-financial private sector: Asia in the 1990s
Credit to the non-financial private sector in selected
emerging economies
Credit to the non-financial private sector
The challenges of international credit
A simple system of financial accounts in which
households consider banknotes the safe asset
The gold standard: a financial accounts presentation
Monetary union: a financial accounts presentation
United States: impact of a 1 per cent decline of CAR on
GDP
Euro area: impact of a 1 per cent decline of CAR on GDP

vii

38
38
47

47

52
58
64
66
67
80
83

84
102
104
108
110
112
116
121
128
131
137
169
169


viii List of Figures

8.1
8.2
8.3
8.4
8.5
8.6
8.7
8.8
8.9
8.10
8.11
8.12
8.13

9.1
9.2
9.3
9.4
9.5
9.6
9.7
10.1
10.2
10.3
11.1
11.2
11.3
11.4
11.5
11.6
11.7
11.8
12.1
12.2
12.3
12.4

Balance sheet financing by debt and equity
Asset growth and leverage growth
Relationship between asset growth and leverage growth
for US household sector
Relationship between asset growth and leverage growth
for US non-financial corporate sector
Increased leverage through expansion in balance sheet size

Regions of increasing and decreasing equity
Set of points with constant equity growth
Leverage growth and asset growth of US investment banks
Leverage growth and asset growth for US commercial
banks
Northern Rock’s liabilities (1998–2007)
Stylised financial system
Short intermediation chain
Long intermediation chain
Leverage-ratio across countries for 1999Q1–2012Q1
Assets growth rate across countries for 1999Q1–2012Q1
Dynamic correlation between notional assets growth
rate and logarithm of leverage
Posterior distributions: parametric Gaussian mixing
distribution
Posterior distributions: Dirichlet Process
Posterior distributions for β2 : Enriched Dirichlet Process
Posterior distributions for β0 and β1 : Enriched Dirichlet
Process
Germany: portfolio structure (1978–2009)
France: portfolio structure (1978–2009)
Households’ portfolio structure in France and in
Germany in 2009
Household net wealth, gross debt and pension wealth
Household wealth and gross debt
Household gross debt
External debt and net financial assets at sector level (2010)
Estimated net savings ratios for the household sector
Financial development, pension wealth and gross debt
Arrears with home loans or rent (2009)

Household gross debt and consumption volatility
Financial liabilities of euro area NFCs
Investment and external financing of euro area NFCs
Original maturity MFI loans to euro area NFCs
Movements in MFI loans to NFCs per maturity

179
180
181
182
183
184
184
185
186
191
194
195
196
208
208
209
218
218
219
220
239
240
243
260

261
262
263
264
265
267
269
273
274
275
276


List of Figures ix

12.5
12.6
12.7
12.8
12A.1

Financial liabilities of euro area NFCs
Financing costs of NFC
Estimated shocks
Shock decomposition of some series in the VAR
Response of endogenous variables to a shock to bank
lending spread
12A.2 Response of endogenous variables to a shock to bank loans
12A.3 Response of endogenous variables to a shock to
investment

13.1 VAR model variables
13.2 The impact of a contractionary monetary policy shock
13.3 The effect of a contractionary monetary policy shock on
other macro variables
13.4 Net funds raised by each sector
13.5 Impact of a contractionary monetary policy shock on
firm assets and liabilities
13.6 Impact of a contractionary monetary policy shock on
net funds raised
13.7 Impact of a contractionary monetary policy shock on
household assets and liabilities
13.8 Impact of a contractionary monetary policy shock on
total loans
13.9 Impact of a contractionary monetary policy shock on
non-bank loans

277
278
283
285
291
292
293
298
299
301
302
303
305
307

312
313


Tables
4.1
4.2
4.3
4.4
4.5

4.6

4.7

4.8
4.9

5.1
7.1
7.2
7.3
7.4
7.5
7.6
7.7
7.8
7.9
7.10
7.11

10.1

Johansen test for cointegration in the DFR model
DFR money demand system for the euro area
Performance of excess liquidity measures in forecasting
inflation
Performance of excess liquidity measures in forecasting
inflation
Out-of-sample euro-area inflation forecast with excess
liquidity measures: MSFE computed over the period
1999 Q1–2009 Q2
Out-of-sample euro-area inflation forecast with excess
liquidity measures: bias computed over the period
1999 Q1–2009 Q2
Out-of-sample euro-area inflation forecast with excess
liquidity measures: variance of the forecast error
computed over the period 1999 Q1–2009 Q2
The adjustment coefficients
Out-of-sample euro area inflation forecast with excess
liquidity measures: MSFE computed over the period
1999 Q1–2011 Q3
Total and US dollar credit to the non-financial private
sector in selected countries
The logical framework
US: does bank capital affect lending standards?
Euro area: does bank capital affect lending
standards?
US: do lending standards affect the dynamics of the
main categories of credit?
Euro area: do lending standards affect the dynamics of

the main categories of credit?
US: does credit affect machinery investment?
US: does credit affect residential investment?
US: does credit affect consumption?
Euro area: does credit affect machinery investment?
Euro area: does credit affect residential investment?
Euro area: does credit affect consumption?
System estimation on German data

x

56
61
70
72

74

76

78
82

85
100
148
156
157
159
160

162
163
164
165
167
168
248


List of Tables xi

10.2
12A.1
12A.2
13.1

System estimation on French data
Estimation results
Variance decomposition
Flow-of-funds variables, IRFs and descriptive statistics

249
288
290
308


Foreword
The biggest financial crisis in a lifetime has shown how important it
is to have a deep understanding 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.
Against this background, the Directorate General Economics and
Directorate General Financial Stability of the European Central Bank
(ECB) jointly hosted a workshop on ‘A flow-of-funds perspective on
the financial crisis: lessons for macrofinancial analysis’ in Frankfurt am
Main, Germany, on 28–29 November 2011. This publication of the
workshop proceedings, complemented by a few invited contributions,
provides a comprehensive overview of a broad range of uses of the flow
of funds within the central bank community as well as in the academic
field. The flow-of-funds perspective on the financial crisis is presented
in two volumes. The first volume on ‘Money, credit and sectoral balance
sheets’ focuses on the role of flow-of-funds analysis in complementing
traditional monetary analysis centred on bank balance sheets and examines the portfolio and financing behaviour of non-financial sectors. The
second, companion volume on ‘Macroeconomic imbalances and risks to
financial stability’ explores the use of flow of funds for macrofinancial
analysis.
Financial flows and sectoral balance sheets are the ‘bread and butter’ of flow-of-funds analysis. They lie at the heart of the financial
crisis, while debt, default and financial intermediation have been largely
absent from mainstream macroeconomic models. As monetary policymakers we had to navigate through uncharted territory in confronting
the fall-out from the crisis, steering a delicate course between preempting disruptive disorderly deleveraging and adverse real–financial
feedback loops while buying time, without soliciting moral hazard, with
respect to necessary structural adjustments and balance sheet repair in
the financial and non-financial sectors (Praet, 2012). A particular challenge for the ECB throughout the crisis has been the need to safeguard
the functioning of the monetary transmission mechanism in the euro
area. This had become impaired, first, by the abrupt shocks to financial intermediation in the wake of the money market freeze in August
xii

Foreword xiii

2007 and the Lehman Brothers insolvency in September 2008, and,
second, by emerging signs of financial market fragmentation across different parts of the euro area in the course of successive stages in the twin
sovereign debt and banking crisis.
Unlike most of macroeconomic mainstream thinking, the ECB has
from its inception placed considerable emphasis on the analysis of bank
balance sheets, money and credit, under the monetary pillar of our
monetary policy strategy. Hence, the financial sector and financial quantities were squarely on our radar screen, as was the need for a central
bank to accommodate liquidity preference shocks during the financial
crisis. In the wake of the financial and sovereign debt crisis, it also
became obvious that monetary policy transmission could not be captured only by a single policy rate, as in textbook macromodels, but as
operating though a whole array of financial prices and quantities, in
the presence of so-called ‘financial frictions’ which have taken centre
stage in much of the policy discussions. In such uncharted territory the
flow of funds provides a very useful map of financial flows and balance
sheets, as well as on the structure of financial intermediation. Hence,
flow-of-funds analysis will continue to be an important element in our
continuous efforts to enhance monetary analysis in the wake of the
crisis, as also documented in Papademos and Stark (eds) (2010).
Following an introductory overview by the editors, the present volume I of the workshop proceedings is subdivided into two parts, each
of which covers contributions from experts in the field. Part I, entitled ‘Money, Credit and Liquidity in the Flow of Funds’, illustrates how
flow-of-funds analysis can be seen as a natural extension of and complement to monetary analysis by looking at money in the context of
the full range of assets held by different sectors and by bringing into
the picture a number of financial intermediation channels beyond the
traditional nexus of bank loans and bank deposits. This suggests taking
a new look at the traditional quantity theory of money, including the
role of banks in the creation of credit, and the international allocation
of portfolios. A few chapters also address the linkages between the availability of liquidity in the economy and its implications for credit booms
and busts.

Part II, on ‘Sectoral Analysis of the Flow of Funds’, brings together
contributions dealing with the balance sheet of financial intermediaries and bank leverage, with implications for the supply of credit to
the other sectors of the economy. An understanding of the demand
side of credit, in turn, requires, in particular, taking a closer look at
both sides of the household and corporate sector balance sheets. The


xiv Foreword

chapters cover a number of key elements in this respect, related to portfolio choices, savings behaviour and debt financing of households and
non-financial corporations, partly also in conjunction with other sectors
of the economy within the integrated flow-of-funds framework.
What can monetary policy-makers take away from this flow-of-funds
perspective on monetary transmission, the availability of liquidity and
the consequences for credit supply and demand? This volume 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 and financial analysis and to develop empirical tools to
extract regularities from the rich flow-of-funds dataset that is already
available and is being further expanded. Over time, this should enable
monetary policy-makers to draw on new insights and instruments in
the analysis of credit cycles and the transmission of monetary policy via
flow-of-funds variables. This renewed recognition of the valuable role
of flow-of-funds analysis for addressing current monetary and macroeconomic challenges in an environment of sectoral deleveraging and
rebalancing, left aside by much of mainstream economics over the past
decades, is an appropriate tribute 50 years after the early work by Tobin
and Brainard (1963) on the role of financial intermediaries in monetary
transmission.
Peter Praet
European Central Bank

References
Praet, P. (2012) Deleveraging and monetary policy, Speech at the Hyman
P. Minsky Conference, Berlin, 26 November.
Papademos, L. and J. Stark (eds) (2010) Enhancing Monetary Analysis (Frankfurt am
Main: European Central Bank).
Tobin, J. and W.C. Brainard (1963) ‘Financial intermediaries and the effectiveness
of monetary controls’, American Economic Review (Papers and Proceedings),
53 (2), 383–400.


Notes on Editors
Bernhard Winkler worked at the Deutsche Bundesbank before joining the European Central Bank (ECB) in July 1998 as Economist in the
Directorate-General Research. Subsequently he held positions as Senior
Economist in the Monetary Policy Strategy Division and in the Counsel to the Executive Board as Advisor to Prof. Otmar Issing. Since May
2005 he is Senior Advisor in the Directorate Monetary Policy responsible, inter alia, for flow-of-funds analysis at the ECB and the co-ordination
of financial projections as part of the quarterly macroeconomic projections exercises. He has published on issues related to monetary and fiscal
policy in a monetary union, on monetary policy communication and on
the Stability and Growth Pact as well as on cross-checking and the flow
of funds.
Ad van Riet joined De Nederlandsche Bank as Economist in 1987
and took up a (Senior) Economist position at the European Monetary
Institute in 1994. He joined the European Central Bank as Principal
Economist when it was established in 1998 and was then in charge
of the Monetary Policy Stance Unit. He became Head of the EU Countries Division in 2000 and Head of the Fiscal Policies Division in 2007.
Since September 2011 he is Senior Advisor in the Directorate General
Economics and Secretary of the ECB Occasional Paper Series. He has
published on European money demand, fiscal policy and structural
reforms.
Peter Bull joined the Bank of England in 1964. After some years in

the economics, international and foreign exchange areas, he moved to
statistics, as Head of the Statistics Department in 1987–94. In 1994 he
joined the European Monetary Institute in Frankfurt as Head of Statistics, 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.

xv


Notes on Contributors
Tobias Adrian is Vice President of the Federal Reserve Bank of New York
and Head of the Capital Markets Function of the Research and Statistics
Group. His research covers asset pricing, financial intermediation and
macroeconomics, with a focus on the aggregate implications of capital
market developments. He has contributed to the New York Fed’s financial stability policy and to its monetary policy briefings. He holds a PhD
from MIT and an MSc from LSE. He has taught at MIT and Princeton
University.
Sanvi Avouyi-Dovi is Senior Advisor at the Microeconomic and Structural Analysis Department and was previously Head of the Research
Division of the Banque de France. Before joining the Banque de France,
he was Head of the Department of Economic and Financial Analysis at
the Caisse des depˆ
ots et consignations (CDC). He is Associate Professor
at Paris-Dauphine University. His main research interests are in macroe´
conomic modelling and applied econometrics. He is a graduate of Ecole
´
Nationale de la Statistique et de l’Administration Economique (ENSAE)
and University of Paris 1, Panth´eon-Sorbonne (PhD). He has published papers on monetary policy, the labour market, macroeconomic
modelling and financial econometrics.

Ulrich Bindseil is Head of the ECB’s Directorate General Market Operations since May 2012, after having been Deputy Director General of the
same Directorate General since September 2009. Previously he was Head
of the ECB’s Liquidity Management Section and Deputy Head and Head
of the ECB’s Risk Management Division. He had joined central banking
in 1994, in the Economics Department of the Deutsche Bundesbank,
after obtaining a PhD in Economics. His publications include Monetary
Policy Implementation (2004) and Risk Management for Central Banks and
Other Public Investors (co-editor, with F. Gonz´alez and E. Tabakis, 2009).
Riccardo Bonci graduated in Statistics at the University of Siena, Italy.
After brief periods working at the National Statistical Institute (Istat) and
at the Italian Ministry of Economics, he joined Banca d’Italia in 2001,
where he was employed in the Financial Accounts Unit at the Research
Department. Between 2007 and 2009 he worked at the European Central Bank on the flow of funds and the estimation and analysis of debt
xvi


Notes on Contributors xvii

and wealth and of the portfolio allocation of households. Back in Italy,
he has been responsible for the Regional Research Office in the Perugia
branch of the Banca d’Italia. Since his return to the ECB at the end of
2012, he has dealt with flow-of-funds projections and with topical issues
regarding private sector debt and deleveraging, both at the euro area and
at the country level.
Vladimir Borgy is Head of the Public Finance Division in the Business
Conditions and Macroeconomic Forecasting Directorate of the Banque
de France. He was previously Senior Economist in the Financial Economics Research Division. Before joining the Banque de France, he
worked as an economist at the CEPII (French research centre in international economics) and in the International Studies Unit of the French
Ministry of Economy, Finance and Industry. He holds a PhD from
the University of Paris 1, Panth´eon-Sorbonne. His research interests

include fiscal policy, financial macroeconomics, portfolio choice and
also demographics and ageing.
Claudio Borio is Head of the Monetary and Economic Department of
the Bank for International Settlements and was previously Deputy Head
of that Department and Director of Research and Statistics. At the BIS
since 1987, he covered various responsibilities in the Monetary and Economic Department, including Head of the Secretariat for the Committee
on the Global Financial System and the Gold and Foreign Exchange
Committee (now known as the Markets Committee). From 1985 to 1987
he worked as an economist at the OECD in the country studies branch of
the Economics and Statistics Department. Prior to that he was Lecturer
and Research Fellow at Brasenose College, Oxford University. He holds a
PhD in Economics from the same university. He is the author of numerous publications in the fields of monetary policy, banking, finance and
issues related to financial stability.
Riccardo De Bonis is at Banca d’Italia, in the Economics, Research and
International Relations Area, where he is Co-Deputy Director in the Economic and Financial Statistics Department. Previously he worked in the
Monetary Sector of the Research Department and in the Banking Prudential Supervision Area of Banca d’Italia. His major fields of interest
include banks, financial systems, household wealth, and economic and
financial statistics.
Roberto De Santis is Senior Economist in the Capital Markets and
Financial Structure Division of the Directorate General Economics of the
European Central Bank since August 2009, having been an economist


xviii Notes on Contributors

in the External Developments Division of the same Directorate General
since November 2000. He joined the ECB in 2000, after a three-year
working experience as an economist in the Kiel Institute of World Economics. He obtained a PhD in Economics from Warwick University in
1998. He has published widely on international economic issues, money
and finance, central banking and economic modelling.

Carlo Favero holds a PhD from Oxford University, where he was a member of the Oxford Econometrics Research Centre. In 2009 he joined
the Department of Finance at Bocconi University, where, as Professor
of Economics, he teaches financial econometrics. He has published in
scholarly journals on the econometric modelling of bond and stock
prices, applied econometrics, monetary policy and time-series models
for macroeconomics and finance. He is a research fellow of CEPR in the
International Macroeconomics programme, president of the Innocenzo
Gasparini Institute for Economic Research at Bocconi University and
a member of the scientific committee of the Centro Interuniversitario
Italiano di Econometria (CIDE).
Louise Funch Sørensen has an MSc in Economics from the University of Copenhagen. She has been employed at Danmarks Nationalbank
since September 2006 (in Market Operations, Department of Economics). Her research interests include exchange rate and monetary
policy, monetary policy instruments and market operations, financial market surveillance, IMF-related issues and panel co-integration
analysis.
´ is employed at the European Central Bank, in the
Celestino Giron
Division of Macroeconomic Statistics. He has developed his career, as
both compiler and analyst, in the field of flow of funds and national
accounts in central banks, at the Banco de Espa˜
na since 1990, and
at the ECB since 1999. His current areas of interest include leverage
dynamics and interaction across agents. He holds a Licenciatura (BA and
MA) in Economics and Business Administration from the University of
Alicante.
Luigi Infante graduated in Economics from the University of Foggia
and received an MSc in Economics from the University Pompeu Fabra.
Since 1994, he has been working for Banca d’Italia, first in the Economic Research Department (Balance of Payments Office), then in the
Bank’s Regional Economic Unit in Milan, and currently in the Economic Research and International Relations Area (Financial Accounts

Notes on Contributors xix

Sector). He has published on different topics, including international
trade, migration and global imbalances.
Jacob Isaksen has an MSc in Economics from the University of Aarhus.
He has been employed at the Department of Economics, Danmarks
Nationalbank since August 2011. His research interests include flow
of funds, international economics, cross-country research and applied
panel co-integration analysis.
Paul Lassenius Kramp holds a PhD in Economics from the University
of Copenhagen. He has been employed at Danmarks Nationalbank since
December 2002 (Statistics Department, Financial Markets, Department
of Economics). His research interests include flow of funds, aggregate
consumption, debt and interaction between the financial sector and the
real economy.
Laurent Maurin is Senior Economist in the Capital Markets and Financial Structure Division of the Directorate General Economics of the
´
European Central Bank. He is a former student of Ecole
Normale
Sup´erieure de Cachan and holds a PhD in Economics from the Universit´e de la M´editerran´ee in Marseille. After having worked for two years
at the Banque de France, he joined the ECB in 2003 on issues related
to monetary analysis. He has worked since on forecasting the euro area
macroeconomy and the analysis of the banking sector.
Robert N. McCauley is Senior Adviser in the Monetary and Economic
Department of the BIS. Before that, he served as Chief Representative
for Asia and the Pacific of the Bank for International Settlements in
2005–08, after joining the BIS Asian Office in 1998. Prior to that, he
worked for 13 years at the Federal Reserve Bank of New York, serving
at times as Chief Economist for the inter-agency committee of bank
supervisors that rates country risk. There he wrote on international comparisons of the cost of capital, foreign bank lending to US corporations

and the unprofitability of foreign direct investment in the US. In 1988,
he worked for the Joint Economic Committee of the US Congress. In
1992 he taught international finance and the multinational firm at the
University of Chicago’s Graduate School of Business. He serves on the
Council of Management of SUERF, the European Money and Finance
Forum.
Patrick McGuire is Head of the International Data Hub and formerly
Senior Economist in the Financial Institutions Section of the Bank for
International Settlements. Prior to joining the BIS in 2002, he completed


xx Notes on Contributors

his PhD in Economics at the University of Michigan with a dissertation
on the Japanese financial system. He studied for several years in Japan
and was a visiting scholar at METI and the Bank of Japan. His current
research is focused on international financial markets and financial stability issues, with a specific interest in international banking, emerging
market financing and hedge funds.
Silvia Mongelluzzo is Consultant at KPMG Advisory, Italy. She obtained
her PhD in Statistics from Bocconi University in Milan. Her research
focuses on the application of Bayesian statistics to a variety of fields,
ranging from economics to biostatistics. Since September 2012, she has
been part of the team of financial risk management at KPMG Advisory,
focusing on the development of statistical models within the Operational Risk area for some of the largest Italian banking groups. Previous
working experience includes the analysis of Euro Area Accounts, sensitivity analysis for hierarchical non-linear models on different prior
specifications at Novartis in the Department of Modelling & Simulation
(Basel), and frailty models (survival analysis) at the Max Planck Institute
(Rostock).
` studied at the London School of Economics, where
Francesco Paterno

he obtained an MSc in Economics in 1995, and at the Kiel Institute for
World Economics in 1996. From 1996 to 2000 he worked as a researcher
at Confindustria Research Office. He joined Banca d’Italia in 2000, working initially in the Economic Research Department, International Sector,
and then from July 2007 in the International Economic Analysis and
Relations Department. He is a member of the G20 International Financial Architecture Working Group and of the ECB International Relations
Committee’s Task Force on IMF issues. He has published articles on the
New Economy, global imbalances, and the macroeconomic impact of
workers’ remittances.
Christian Pfister is Deputy Director General for Statistics at the Banque
de France. He was previously Director for Economic Analysis and
Research and then Deputy Director General for Economics and International Relations of the Banque de France, which he joined in 1980. He
´
teaches at the Ecole
Nationale de la Statistique et de l’Administration
´
´
´
Economique
(ENSAE). He graduated from Ecole
des Hautes Etudes
Com´
merciales (HEC) in 1976 and from Institut d’Etudes
Politiques de Paris
(Sciences Po) in 1978. He has published on monetary policy, monetary
unification, financial stability, labour market, structural reforms and
international economics.


Notes on Contributors xxi

Barbara Roffia is Secretary of the Monetary Policy Committee of the
European System of Central Banks and also works as a Senior Economist
in the Directorate Monetary Policy of the European Central Bank. She
holds a PhD in Economics from the University of Warwick. She has published a number of articles related to monetary policy and international
macroeconomics.
Carmelo Salleo is Advisor in the Secretariat of the European Systemic
Risk Board (ESRB). He is the Secretary of its Advisory Scientific Committee and coordinates analytical work in the fields of financial stability
and macroprudential policy. He was formerly Economist and Head of
Unit in the Research Department of Banca d’Italia. His research interests
cover financial stability, bank funding, financial constraints to investment and bank mergers. He holds a PhD in Economics from Harvard
University.
Michael Scharnagl is an economist at Deutsche Bundesbank. His main
research interests are monetary policy (money demand, monetary policy rules, identification of loan supply shocks) and time series analysis
(Bayesian VARs, Bayesian Model Averaging) as well as wavelet analysis.
Franck S´edillot is Head of the Financial Accounts Division in the
Monetary and Financial Directorate of the Banque de France. He
was previously seconded to the European Central Bank (Directorate
General Economics) and the OECD (Economic Department). In both
organisations, he developed short-run econometric models to assess economic activity. He has published articles on world models and scenario
analysis.
Hyun Song Shin is Hughes-Rogers Professor of Economics at Princeton
University and has been appointed as of May 2014 as Economic Advisor and Head of Research at the Bank for International Settlements. His
research interests cover financial institutions, risk and financial stability
issues. Before moving to Princeton in 2006, he was based in the United
Kingdom, holding academic positions in Oxford and the London School
of Economics. In 2010, he was on leave from Princeton, serving in a policy role in Korea as Senior Advisor to President Lee Myung-bak. He is a
fellow of the Econometric Society and of the British Academy.
Søren Vester Sørensen holds a PhD in Economics from the University
of Aarhus. He has been employed at Danmarks Nationalbank since April
2007 (Department of Economics). His research interests include flow of

funds, international economics and macrofinancial linkages.


xxii Notes on Contributors

Richard Werner is Professor in International Banking at the University
of Southampton Management School in England, and is Director of the
University of Southampton Centre for Banking, Finance and Sustainable
Development. He is also Chair of LocalFirst Community Interest Company and a member of the ECB Shadow Council. In the past he was
also Visiting Professor of Macroeconomics and Monetary Economics at
House of Finance, Goethe-University Frankfurt; Assistant Professor of
Economics at Sophia University, Tokyo; Senior Managing Director and
Senior Portfolio Manager at Bear Stearns Asset Management Ltd.; Chief
Economist at Jardine Fleming Securities (Asia) Ltd.; Visiting Researcher
at the Bank of Japan; Visiting Scholar at the Japanese Ministry of Finance
and Senior Consultant to the Asian Development Bank. He obtained a
DPhil in Economics from the University of Oxford. Major works include
New Paradigm in Macroeconomics (2005) and Princes of the Yen (2003). He
is Series Editor of Palgrave Studies in Economics and Banking.
Adalbert Winkler is Professor for International and Development
Finance at the Frankfurt School of Finance & Management. Before joining the Frankfurt School, he pursued a career in development finance
and central banking, serving in the European Central Bank’s Directorate
General International and European Relations and in the International
Department of Deutsche Bundesbank. He holds a PhD from Trier
University and a post-doc (‘Habilitation’) from the Bayerische JuliusMaximilians University of W¨
urzburg. His research interests and publications focus on monetary policy, the global monetary and financial
system, as well as development finance and microfinance.


1

Introduction and Overview∗
Bernhard Winkler, Ad van Riet and Peter Bull

1.1 Introduction
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. As described
by Winkler (2010), the financial accounts track funds as they move from
sectors, such as households, that serve as sources of funds (net lenders),
through intermediaries (financial corporations) or financial markets, to
sectors that use the funds to acquire physical and financial assets (nonfinancial corporations, government, rest of the world). These flows,
together with valuation changes, result in changes to sectoral (net) asset
positions and the composition of the corresponding balance sheets.
The financial crisis has driven home the importance of financial flows
and balance sheets for an understanding of real–financial linkages and
it has spurred a renewed academic and policy interest in flow-of-funds
analysis. During the crisis policy-makers could rely neither on received
wisdom and assumptions on liquid and efficient markets underlying the
functioning of the financial system, nor on standard macroeconomic
workhorse models, to give ready answers on the origins, transmission
channels and policy implications of the financial crisis. In such circumstances flow-of-funds data could be seen, at least, to provide a promising
framework to articulate relevant questions to be asked when confronting
new challenges for monetary policy and financial stability, such as
related to debt and asset market dynamics, leverage cycles, financial
∗ c The authors on behalf of the European Central Bank (ECB). This chapter

should not be reported as representing the views of the ECB. The views expressed
are those of the authors and do not necessarily reflect those of the ECB.
1

2 Winkler et al.

intermediation chains and feedback loops between the financial system
and the real economy (see ECB, 2012).
The financial crisis has, hence, underlined the relevance of flow-offunds analysis from a policy perspective, for example, for an understanding of factors behind the building up of macrofinancial imbalances
and the accumulation of balance sheet vulnerabilities (see ECB, 2011).
In this respect, the flow of funds provides a nexus between the ‘flow’
dynamics of money, credit and other financial intermediation flows
and the implications for ‘stock’ dynamics in terms of sectoral balance
sheets and the evolution of assets and liabilities. On this basis one can,
for example, construct early warning indicators for financial boom-bust
cycles. In particular, private and public sector debt indicators based
on financial accounts data have become an important element in the
enhanced surveillance of macroeconomic imbalances (in both the EU
and the G20 context). Moreover, flow-of-funds approaches can be used
for macroprudential risk analysis.
Central banks have traditionally taken a close interest in the working
of the financial system and have for a long time invested in compiling
financial accounts, most notably at the US Federal Reserve, but also at
the Bank of Japan and at many European national central banks. For a
comprehensive compilation of key academic papers and applications see
Dawson (ed.) (1996). The set of studies included in De Bonis and Pozzolo
(eds) (2012) is also highly recommended. Flow-of-funds analysis for the
euro area is a relatively recent endeavour. For the European Central Bank
it offers a natural platform for cross-checking and ‘bridging’ analysis
under the economic and monetary ‘pillars’ that are a key feature of its
monetary policy strategy (see Winkler, 2010).
The remainder of this introduction and overview summarises the contributions to the workshop proceedings collected in the present volume,
sub-divided into two thematic parts, each covering a specific field of

interest.

1.2 Part I: Money, credit and liquidity in the
flow of funds
While mainstream macroeconomic models had got used to largely
ignoring financial developments, the growing economic importance
and complexity of financial sectors and markets has spurred a renewed
academic and policy interest in flow-of-funds analysis. The contributions in Part I of this volume, entitled ‘Money, credit and liquidity in the