Working Paper No. 614
By Stephen Burgess, Oliver Burrows, Antoine Godin, Stephen Kinsella and Stephen Millard
We construct a new scenario analysis model for the United Kingdom using ONS data from 1987 to the present. The model links decisions about real variables to credit creation in the financial sector and decisions about asset allocation among investors for a wide array of financial assets. We develop, estimate, and calibrate the model from first principles as well as describing the stock-flow coherent database we construct to validate the model. We impose several scenarios on the model to test its usefulness as a medium term scenario analysis tool, including increases in banks’ capital ratios, sudden stops, changes in investment, increases in house prices and fiscal expansions.