Macroeconomic Implications of Financial Imperfections: A Survey

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 acceleratortype
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.