Macroeconomic Implications of Financial Imperfections: A Survey

116 Pages Posted: 1 Dec 2017

See all articles by Stijn Claessens

Stijn Claessens

Bank for International Settlements (BIS)

M. Ayhan Kose

Development Prospects Group at the World Bank

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Date Written: November 28, 2017

Abstract

This paper surveys the theoretical and empirical literature on the macroeconomic implications of financial imperfections. It focuses on two major channels through which financial imperfections can affect macroeconomic outcomes. The first channel, which operates through the demand side of finance and is captured by financial accelerator-type mechanisms, describes how changes in borrowers' balance sheets can affect their access to finance and thereby amplify and propagate economic and financial shocks. The second channel, which is associated with the supply side of finance, emphasises the implications of changes in financial intermediaries' balance sheets for the supply of credit, liquidity and asset prices, and, consequently, for macroeconomic outcomes. These channels have been shown to be important in explaining the linkages between the real economy and the financial sector. That said, many questions remain.

Keywords: Macroeconomic Management, Economic Forecasting, Governance Diagnostic Capacity Building

Suggested Citation

Claessens, Stijn and Kose, M. Ayhan, Macroeconomic Implications of Financial Imperfections: A Survey (November 28, 2017). World Bank Policy Research Working Paper No. 8260. Available at SSRN: https://ssrn.com/abstract=3079172

Stijn Claessens (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

M. Ayhan Kose

Development Prospects Group at the World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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