Financial Frictions in Macroeconomic Models
This is an advance summary of a forthcoming article in the Oxford Research Encyclopedia of Economics and Finance. Please check back later for the full article.
In recent decades, macroeconomic researchers have looked to incorporate financial intermediaries explicitly in business cycle models. These modeling developments have helped us to understand the role of the financial sector in the transmission of policy and external shocks into macroeconomic dynamics. They have also helped us to better understand the consequences of financial instability for the macroeconomy.
There remain large gaps in our knowledge of the interactions between the financial sector and macroeconomic outcomes. Specifically, the effects of financial stability and macroprudential policies are not well understood.