Financial Frictions in Macroeconomic Models

In recent decades, macroeconomic researchers have looked to incorporate financial

intermediaries explicitly into 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 also have helped us to understand

better the consequences of financial instability for the macroeconomy. Large gaps remain

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.