Financial frictions in macroeconomics

Lawrence Christiano

Journal of International Money and Finance, 2022, vol. 122, issue C

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.

Keywords: Risk shock; Business cycles; Rollover crisis; Banking; Interest rate spread (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:122:y:2022:i:c:s0261560621001807

DOI: 10.1016/j.jimonfin.2021.102529

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