BIS Review 129/2010  5  When the financial system is not working normally, we cannot rely on the short-cut from interest rates to output and inflation. We need a deeper understanding of how the central bank’s balance sheet affects financial intermediation and the credit and money balances of businesses and households.
In other words, we need a better understanding of money and credit flows at a more disaggregated level and we need to develop models that include money, credit, and the key institutional features of banking and capital markets. If we look only at interest rates, inflation, and output, we may miss bubbles and other elements of systemic risk as they build.