Linkages between the Financial and the Real Sector of the Economy: A Literature Survey
AbstractThis document reviews the literature on the relationship between financial markets and the real economy. In the light of the recent financial crises, we focus on channels that are likely to be important in times of financial stress. Some channels�are governed by balance sheet effects�like the Financial Accelerator and the Bank Lending Channel. We discuss the significance of these channels in the light of empirical evidence and try to extract their quantitative importance from the literature. Both channels seem to have played an important role in the aftermath of the crisis. Further, we discuss the role of trade finance in the collapse in world trade following the financial crisis 2007-2009. While finance is important for trade, the literature is not conclusive on whether finance was also the reason for the observed collapse. Naturally, risk is important during a financial crisis. Taking a look at risk channels, we find risk also to play an important role in feedback loops between finance and the real economy. The theoretical and empirical evidence found in the literature appears to be useful in explaining the severe and long-lasting effects of the recent financial crisis.
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Bibliographic InfoPaper provided by CPB Netherlands Bureau for Economic Policy Analysis in its series CPB Document with number 216.
Date of creation: Dec 2010
Date of revision:
Find related papers by JEL classification:
- G01 - Financial Economics - - General - - - Financial Crises
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
- F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-02-26 (All new papers)
- NEP-CBA-2011-02-26 (Central Banking)
- NEP-MAC-2011-02-26 (Macroeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Wachter, Jessica A., 2006. "A consumption-based model of the term structure of interest rates," Journal of Financial Economics, Elsevier, vol. 79(2), pages 365-399, February.
- Claudio Raddatz, 2010.
"Credit Chains and Sectoral Comovement: Does the Use of Trade Credit Amplify Sectoral Shocks?,"
The Review of Economics and Statistics,
MIT Press, vol. 92(4), pages 985-1003, November.
- Raddatz, Claudio, 2008. "Credit chains and sectoral comovemen t: does the use of trade credit amplify sectoral shocks ?," Policy Research Working Paper Series 4525, The World Bank.
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