Growing Fragilities? Balance Sheets in the Great Moderation

36 Pages Posted: 22 Apr 2011

Date Written: April 12, 2011

Abstract

The years leading up to the financial crisis are widely acclaimed as a period of remarkable, if not unprecedented, stability in the global economy. From a perspective that focuses on the value and volume of gross domestic product, that assessment is valid. The world’s major economies enjoyed a sustained period of growth. Inflation was low and stable. But from a perspective that focuses on the value of financial assets and on the volume of market activity, this period was anything but stable. The past decade has borne witness to sharp swings in asset prices and a large expansion in credit and balance sheets. This paper considers a flow-of-funds approach that stresses the role of asset prices, credit and balance sheets. This framework is used to shine a different light on the Great Moderation in the United Kingdom. It suggests that there were linkages between many of the macroeconomic puzzles of the day and the balance sheet developments that led to financial instability. It further argues that approaches to macroeconomics that stress the importance of balance sheet linkages might be helpful in spotting building financial fragility.

Suggested Citation

Barwell, Richard and Burrows, Oliver, Growing Fragilities? Balance Sheets in the Great Moderation (April 12, 2011). Bank of England Financial Stability Paper No. 10, Available at SSRN: https://ssrn.com/abstract=1815000

Richard Barwell

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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