Financial Intermediation and Credit Policy in business cycle analysis

Abstract

We develop a canonical framework to help organize thinking about credit market frictions and aggregate economic activity in the context of the current crisis. We use the framework to focus on two issues in particular: …rst, how disruptions in …nancial intermediation can induce a crisis that a¤ects real activity; and second, to illustrate how various credit market interventions by the central bank and/or the Treasury of the type we have seen recently, might work to mitigate the crisis. We make use of earlier literature to develop the particular framework we o¤er. We also characterize how very recent literature is incorporating insights from the crisis. Prepared for the Handbook of Monetary Economics 1 1