Credit Aggregates from the Flow of Funds Accounts

By Reid, Milton P., III; Schreft, Stacey L. | Economic Quarterly - Federal Reserve Bank of Richmond, Summer 1993 | Go to article overview

Credit Aggregates from the Flow of Funds Accounts


Reid, Milton P., III, Schreft, Stacey L., Economic Quarterly - Federal Reserve Bank of Richmond


One reason analysts study financial variables is to determine how activity in financial markets affects the macroeconomy. For example, there is evidence that reduced credit flows contributed to the Depression (Bernanke 1983). Likewise, the Federal Reserve's Credit Restraint Program of 1980 magnified the 1980 recession by increasing uncertainty about credit availability (Schreft 1990). More recently, analysts have debated the implications of rapid credit growth for financial stability (Federal Reserve Bank of Kansas City 1986) and argued that debt repayment by consumers and businesses contributed significantly to the 1990-91 recession and the unusually weak recovery that followed (1992 Economic Report of the President, p. 27). The link between financial intermediation and economic growth and development is an ongoing area of study (e.g., McKinnon 1973; Greenwood and Smith 1993).

Analysts use both broad and narrow measures of credit in macroeconomic research. Support for using broad measures of credit comes from the ease with which different forms of credit substitute for one another. Because of this substitutability, broad measures reflect more accurately, for example, the extent to which credit availability is reduced during a credit crunch. Moreover, broad measures complement the monetary aggregates. In fact, since 1983, the Federal Open Market Committee, the Federal Reserve System's monetary policymaking arm, has set monitoring ranges for domestic nonfinancial debt.

In contrast, narrow measures focus only on specific types of credit. Some researchers focus on bank credit. for example, because they argue that it plays a crucial role in the mechanism by which monetary policy is transmitted to the real economy (see Morgan [1992] for a summary of this position). These researchers justify the use of the narrow measure by arguing that for some borrowers bank credit is the only form of credit available to finance spending plans; substitutability of bank and nonbank credit is not possible for these borrowers.

The leading source of data on credit aggregates is the Flow of Funds Accounts (FOFA). This article provides an introduction to the accounts. The first section describes the nature, history, and availability of the accounts. Section 2 explains the accounts' organization by sector and transaction. The third section traces the behavior over time of various credit measures from the FOFA. Section 4 highlights features of the accounts that warrant caution, and finally Section 5 provides suggestions for additional readings that provide a more thorough discussion of the accounts.

1. AN INTRODUCTION TO THE FLOW OF FUNDS

Nature of the Accounts

The FOFA are designed to measure the financial and nonfinancial transactions associated with sectoral and aggregate investment activity. By cataloging the financial flows associated with current income and production, the FOFA complement the National Income and Product Accounts (NIPA). While the NIPA measure total saving and investment in a particular sector, the FOFA reveal how a sector finances investment in excess of its saving. That is, according to economist James Tobin (1962, p. 190), the FOFA are an

ex post record of the processes by which supplies and demands for various financial assets are balanced....The basic behavior behind the flow of funds is the adjustment of the balance sheets, or portfolios, of individuals, business firms, and financial enterprises toward a desired allocation of wealth among holdings of various assets and debts. In this adjustment, the basic decision variables are stocks; and flows will be dominated by attempts to adjust stocks to changes in total wealth, interest rates, and other determinants.

The information in the FOFA is potentially of great use to economists, policymakers, and financial market participants. Surprisingly, however, knowledge and use of these accounts for economic analysis has been limited. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Credit Aggregates from the Flow of Funds Accounts
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Author Advanced search

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.