[7] Changes in the structure of the financial sector – both secular trends and the consequences of regulatory changes introduced following the crisis – have shifted activity away from banks to nonbank financial institutions (NBFIs) (what we used to call ‘shadow banks’). The NBFI sector has become a more important part of the financial sector and, as a result, a more important channel of monetary policy transmission. For monetary policy makers, understanding transmission via the asset markets where NBFIs operate has therefore become more important. How money flows within the financial sector – among banks, among NBFIs, and between banks and NBFIs – influence asset prices are becoming more central relative to the more traditional analysis of how financial flows between banks, on the one hand, and households and firms, on the other, influence spending and pricing decisions in the real economy. This has important implications not just for the character of the analysis but also the definition of the relevant measures of money upon which focus is required. While this shift has been evident for some time, the so-called ‘dash-for-cash’ episode at outset of the Covid-19 pandemic brought home the potential magnitude of these effects. As the label itself  Page 5  suggests, the conventional explanation of this event suggests a lack of safe and liquid monetary assets fed market dislocation. This is an episode to which I will return later in the talk.
This convergence was also evident in the academic literature, as reflected in the similarity of approaches adopted by Goodfriend and King (1997) and Rotemberg and Woodford (1997), despite the former coming from a classical / monetarist starting point and the latter from a New Keynesian perspective. 11. See Busetto, et al. (2022), which builds on Haldane et al. (2016) and Bailey, et al. (2020). 12. See Friedman and Schwartz (1963). 13. See Hatzius, et al. (2010) for a discussion. 14. See Giese et al. (2021) and Czech, et al. (2021) for examples of this form of analysis. 15. See Joyce, et al. (2011) for the starting point of this analysis in the UK. 16. The ‘toy model’ outlined in the Annex is a highly stylised version of parts of the much richer empirical model presented in Cloyne, et al. (2015), which has been used to undertake analysis at the Bank of England. 17. See Bank of England Monetary Policy Report, August 2021, Box A.