A sectoral framework for analyzing money, credit and unconventional monetary policy

This paper sets out an empirical framework for examining the dynamics of money and credit at a sectoral level. Our purpose is to understand and monitor the transmission mechanisms of different policies that affect the financial sector, with an eye to practical policy analysis. We use the banking system’s balance sheet as an organising framework and model the stocks of broad money and credit held by different sectors. Each sector is modelled as a separate block with money, credit, and sectoral expenditure modelled jointly together with the relevant financial yields. The sectors are then knitted together using aggregate relationships and identities. Overall the model can be thought of as an estimated disaggregated version of the IS-LM-CC model which additionally incorporates the principle that ‘loans create deposits’. We illustrate, by example, how this framework can be used in practice: first by examining the sectoral transmission of quantitative easing and second, the effect of disturbances to credit markets. We also discuss how other policy tools, such as the Funding for Lending Scheme and macroprudential policies, could be examined in our framework.