Surveys of Theory, Evidence and Policy
Edited by Christopher J. Green, Colin Kirkpatrick and Victor Murinde
Chapter 3: Flow of Funds: The Relationship between Finance and the Macroeconomy
3. Flow of funds: the relationship between ﬁnance and the macroeconomy Christopher J. Green and Victor Murinde 1. INTRODUCTION The ﬂow of funds is an accounting framework and not a theory or a policy prescription. However, this framework and the data available within it provide the basis for a wide range of applied analyses of economic problems and policies. Most importantly, ﬂow of funds analysis provides a general framework for studying the ﬁnancial sector and its relationships with the real economy. Flow of funds has been widely used in the industrial economies as a basic information tool, in general empirical research, and for detailed ﬁnancial policy analysis. See Green (1992) for a review of this work. Dawson (1996) provides several interesting examples of ﬂow of funds applications. A comprehensive search for relevant literature indicates that relatively little ﬂow of funds work has been done for developing countries. In part, the paucity of work on ﬂow of funds can be explained by an almost complete absence of sufﬁciently detailed data in most developing countries. Murinde (1996) gives examples of ﬂow of funds data and applications in several developing countries; Fleming and Giugale (2000) provide examples for the transition economies of central and eastern Europe. The absence of ﬂow of funds data in developing economies is unfortunate, for it can be argued that ﬂow of funds analysis may be of more value in the developing world than in the industrial countries. Economic analysis and policy are based on both the prices...
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