Macrohistory Seminar: Bernhard Winkler (ECB)

Event details

  • | Thursday, February 11
  • 12:15 PM
  • Kaiserplatz 7-9, 4th floor, Room 4.006

A flow-of-funds perspective on the financial crisis – the role of sectoral leverage and balance sheets

with Celestino Giron.

We provide a narrative of the financial crisis following a flow-of-funds perspective focusing on the rotation of savings-investment imbalances and leverage across economic sectors. The role of excessive leverage (in terms of debt-to-income or underlying debt-to-asset ratios) in the genesis and evolution of the financial crisis has raised interest in analytical avenues to better understand the stock-flow dynamics and the interrelation between leverage and deleveraging processes across different sectors. Most existing analyses on the subject are partial in that they ignore feed-back effects across the balance-sheet positions of different economic agents. We take a step in the direction of clarifying these inter-linkages by making use of the national accounts methodological apparatus to establish cross-agent leverage restrictions. We also examine deleveraging contagion chains, and the role that some agents (namely governments and/or central banks) can play to serve as a backstop to counter the propagation of such chains by expanding their own balance sheet. This enables us to interpret the central banks’ crisis response as, apart from fulfilling their traditional role as lender of last resort to the banking system, more broadly reflecting their capacity to act as the “ultimate sector” that can take on leverage when other sectors are under pressure to deleverage.

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