Abstract
This chapter discusses the empirical analysis of money and credit undertaken at the Bank of England during the financial crisis and how it is used. An aggregate structural vector autoregression sVAR including money is employed to analyse the impact of quantitative easing (QE), as a crosscheck on other approaches focussing on the impact on financial market prices. Sectoral models of money and credit are used to assess the impact of the crisis and the associated shock to credit conditions. The contraction in the supply of credit to each sector can explain a substantial proportion of the shortfall in GDP relative to its pre-crisis trend. The shocks can also explain a large part of the fall in credit and much of the contraction in the customer funding gap.
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Notes
- 1.
- 2.
See, for example, Kaldor and Trevithick (1981).
- 3.
Defined as M4 excluding the holding of intermediate OFCs deflated by the GDP deflator.
- 4.
The coefficient on output is above unity, suggesting the VAR is missing some determinants of underlying broad money velocity. Work on sectoral money demand suggests that broader measures of wealth (over and above that captured by share prices) are relevant for the long-run demand for money, see Thomas (1997a, 1997b).
- 5.
Bank Rate in the case of variable rate loans and swap rates for fixed rate mortgages.
- 6.
However, this may illustrate data limitations. Because of the lack of mix-adjusted loan rates, our measure of corporate spreads is partly constructed by using bond yields. See Butt and Pugh (2014) for more detail.
- 7.
Broad money here consists of notes and coin held by the UK non-bank private sector, plus sight and time deposits, sale and repurchase agreements, and bank-issued securities of up to and including five years’ original maturity.
- 8.
These elements comprise lending to NIOFCs, the lending and deposits of IOFCs, foreign currency lending and deposits, and overseas residents’ sterling borrowing and deposits.
- 9.
Another way of putting this is that, because spreads rose despite a probable fall in credit demand, we can be fairly sure that credit supply contracted. Barnett and Thomas (2013) use sign restrictions on the response of spreads to help identify credit supply shocks.
- 10.
Note, this is a particular definition of the CFG; broader definitions are often used to monitor financial stability risks.
- 11.
Unlike financial assets, which are ultimately claims on other sectors, increases in house prices do not really represent increases in the wealth of the household sector—they simply cause transfers of wealth between current owners and future first-time buyers. Econometric work with micro-data finds support for liquidity effects but not wealth effects, suggesting that the strong correlation between house prices and private consumption is driven mainly by common factors—see Attanasio, Blow, Hamilton, and Leicester (2005) and Disney, Gathergood, and Henley (2010).
- 12.
Based on the measures we model, the stock of credit to the real economy grew by around 70 % between end-2002 and end-2007. The ratio of credit to GDP increased from around 88 % to around 124 %. Other factors contributing to the strong trend in lending aggregates may have been the low level of global interest rates, changes in credit conditions that are not picked up by the spread data which we have used, or the long period of stable growth reducing perceptions of risk—see McLeay and Thomas (2015).
- 13.
The range depends on how the ‘pre-crisis trend’ is defined—either by fitting a log linear trend to the data from 1997 to 2007, or by projecting the average growth rate over this period forward from 2007Q3 onwards. Of course, to the extent that there were influences in the pre-crisis period that had a secular effect on credit growth and which are not captured in our spread variables, this will not necessarily be the most appropriate counterfactual.
- 14.
In further work, we plan to model the Commercial Real Estate (CRE) sector more explicitly; a large part of the stock of lending to PNFCs is associated with CRE.
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Bridges, J., Cloyne, J., Thomas, R., Tuckett, A. (2016). The Analysis of Money and Credit During the Financial Crisis: The Approach At the Bank of England. In: Cobham, D. (eds) Monetary Analysis at Central Banks. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-137-59335-1_2
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