Flow-of-Funds Analysis at the ECB – Framework and Applications

Duc, Louis Bê; Breton, Gwenaël Le

doi:10.2139/ssrn.1325246

Cited by 4 publications

(1 citation statement)

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“…This approach, which has emerged from recent scholarship of the Money View (2017) and critical macro-finance (Dutta et al 2020;Gabor 2020), offers a novel historical-institutionalist way of analysing the political economy of the European monetary and financial system. Other models of Europe's monetary and financial system describe it with less institutional detail and historical specificity-for instance, New Keynesian Dynamic Stochastic General Equilibrium (DSGE) models (Smets and Wouters 2002), Stock Flow Consistent (SFC) models in the Post Keynesian tradition (Miess et al 2019), or flow of funds (FoF) models (Bê Duc and Le Breton 2009). These approaches provide an idealised representation of real-world institutional configurations and then feed them with statistical data to analyse and predict variables such as prices, quantities, or interest rates.…”

Section: Introductionmentioning

confidence: 99%

Green Macro-Financial Governance in the European Monetary Architecture: Assessing the Capacity to Finance the Net-Zero Transition

Guter-Sandu,

Haas,

Murau

2023

Preprint

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The Green Transition to net-zero carbon emissions in Europe requires massive financing efforts, with estimates of 620 billion EUR annually, but the headwinds are substantive. Central banks seem overstretched and busy tightening to combat inflation; treasuries are subject to austerity-inducing fiscal rules; and banking systems are afflicted by non-performing loans, fragmentation, and risk aversion. We employ the framework of ‘monetary architecture’ to analyse the EU’s monetary and financial system as a constantly evolving hierarchical web of interlocking balance sheets and study its capacity to find ‘elasticity space’ to meet the financing challenge. To this end, we draw on a four-step scheme for green macro-financial governance along the financial cycle of balance sheet expansion, funding, and final contraction. We find that, first, Europe’s monetary architecture still has ample elasticity space to provide a green initial expansion due to its developed ecosystem of national, subnational, and supranational off-balance-sheet fiscal agencies. Second, as mechanisms lack to consciously organise the distribution of long-term debt instruments across different segments, its capacity to provide long-term funding is limited. Third, institutional transformation in the last two decades have greatly improved the capacity of the European monetary architecture to counteract financial instability by providing emergency elasticity. Fourth, the capacity of the European monetary architecture to manage a final contraction of balance sheets is limited, which is a general quandary in modern credit money systems. Our analysis points to the need for further investigations into techniques for monetary architectures to manage long-term funding and balance sheet contractions.

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