A Simple Closed-Economy Model with Financial Frictions

Pierre-Richard Agénor ()
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Pierre-Richard Agénor: University of Manchester, School of Social Sciences

Chapter 2 in Monetary Policy and Macroprudential Regulation with Financial Frictions, 2025, pp 43-114 from Springer

Abstract: Abstract Describes a simple, static model of a closed economy with financial frictions, which take the form of credit market imperfections. In particular, the model helps to illustrate in a simple way the main feature of the financial amplification effect, namely, the fact that the size of the premium that lenders impose on borrowers depends on the balance sheet conditions of these borrowers. The model is used to study the transmission mechanism of monetary and macroprudential policies, at first individually, and subsequently in combination, in response to real and financial shocks.

Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-032-01673-7_2

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DOI: 10.1007/978-3-032-01673-7_2

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