Frontiers of Macrofinancial Linkages

199 Pages Posted: 25 Jan 2018

See all articles by Stijn Claessens

Stijn Claessens

Bank for International Settlements (BIS)

M. Ayhan Kose

World Bank; Brookings Institution; Centre for Economic Policy Research (CEPR); Australian National University (ANU)

Date Written: January 2018


The Great Financial Crisis of 2007-09 confirmed the vital importance of advancing our understanding of macrofinancial linkages, the two-way interactions between the real economy and the financial sector. The crisis was a bitter reminder of how sharp fluctuations in asset prices, credit and capital flows can have dramatic impact on the financial positions of households, corporations and sovereign nations. As fluctuations were amplified, the global financial system was brought to the brink of collapse and the deepest contraction in world output in more than half a century followed. Moreover, unprecedented challenges for fiscal, monetary and financial regulatory policies resulted.

The crisis revived an old debate in the economics profession about the importance of macrofinancial linkages. Some argue that the crisis was a painful reminder of our limited knowledge of these linkages. Others claim that the profession had already made substantial progress in understanding them but that there was too much emphasis on narrow approaches and modelling choices. Yet, most also recognise that the absence of a unifying framework to study these two-way interactions has limited the practical applications of existing knowledge and impeded the formulation of policies.

With these observations in mind, this paper presents a systematic review of the rapidly expanding literature on macrofinancial linkages. It first surveys the literature on the linkages between asset prices and macroeconomic outcomes. It then reviews the literature on the macroeconomic implications of financial imperfections. It also examines the global dimensions of macrofinancial linkages and documents the main stylized facts about the linkages between the real economy and the financial sector. The topic of macrofinancial linkages promises to remain an exciting area of research, given the many open questions and significant policy interest. The paper concludes with a discussion of possible directions for future research, stressing the need for richer theoretical models, more robust empirical work and better quality data so as to advance knowledge and help guide policymakers going forward.

JEL Classification: D53, E21, E32, E44, E51, F36, F44, F65, G01, G10, G12, G14, G15, G21

Suggested Citation

Claessens, Stijn and Kose, M. Ayhan, Frontiers of Macrofinancial Linkages (January 2018). BIS Paper No. 95, Available at SSRN:

Stijn Claessens (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
CH-4002 Basel

M. Ayhan Kose

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Brookings Institution ( email )

1775 Massachusetts Ave, NW
Washington, DC 20036
United States

Centre for Economic Policy Research (CEPR) ( email )

United Kingdom

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601

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