New Lessons for Macroeconomics and Finance Theory

Ioanna Kokores

Chapter Chapter 3 in Monetary Policy in Interdependent Economies, 2023, pp 39-71 from Springer

Abstract: Abstract This chapter argues that even though modern macroeconomic analysis unveiled its inability to effectively model the role of financial intermediaries as key factors in the workings of the monetary transmission mechanism since the advent of the GFC, our understanding of the transmission mechanism from monetary policy to financial stability remains limited to date. Alternative models of the broad “credit channel” emphasize the role of financial frictions that result from borrowers’ behavior to monetary policy effectiveness and efficiency, demonstrating the ways in which monetary policy influences the real economy (i.e., the monetary transmission mechanism). However, as the current understanding and experience justify, on balance, a case for “leaning against the wind” remains limited since under a substantial slack in the macroeconomy transmission from interest rates to financial risks remains weak, costs often appear greater than benefits, and implementation hurdles are substantial. According to current knowledge and the recent unforeseen resurgence of inflation, benefits of a well-conducted monetary policy may easily outweigh costs in certain circumstances, even if they are relatively unlikely. In this sense, these circumstances are likely to reflect a convergence of initial conditions relative to the conjunctural cycle and structural factors that are particular to each country.

Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:spr:fimchp:978-3-031-41958-4_3

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DOI: 10.1007/978-3-031-41958-4_3

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