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Financial frictions in macroeconomics

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  • Christiano, Lawrence

Abstract

I review two examples that show how the nature of the financial system can play a central role in shaping the behavior of the aggregate economy. In the first example, variations over time in the cross-sectional dispersion of a productivity shock, which would have no aggregate effect in a frictionless model, produce effects that look like business cycles because of the nature of financial (and nominal) frictions. The second example suggests how a shock originating outside the financial system, which ordinarily might not be expected to have a large aggregate effect, can lead to a systemic banking collapse. The relevance of the examples to the US economy is discussed.

Suggested Citation

  • Christiano, Lawrence, 2022. "Financial frictions in macroeconomics," Journal of International Money and Finance, Elsevier, vol. 122(C).
    • Handle: RePEc:eee:jimfin:v:122:y:2022:i:c:s0261560621001807
    DOI: 10.1016/j.jimonfin.2021.102529
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    References listed on IDEAS

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