Financial Frictions: Empirical Support and Implications for Policy


This theme also forms part of the ESRC-financed project “Monetary and Fiscal Policy Rules with Labour Market and Financial Frictions”.


The aim of this research is to first, systematically assess the empirical support for the existence of financial frictions that restrict the availability of credit in household-bank, bank-bank and bank-firm relationships. As in the fiscal project, these features will be embedded in a medium size New Keynesian model estimated by Bayesian methods.

The second aim is to study the implications of each friction in turn for the conduct of optimal monetary policy, both in normal times, and in periods following a financial crisis.  The final stage of the project will bring the fiscal and financial frictions together to explore the importance of the latter for the fiscal transmission mechanism.


Giovanni Melina & Stefania Villa, 2011. "Fiscal Policy and Lending Relationships," Birkbeck Working Papers in Economics and Finance 1103, Birkbeck, Department of Economics, Mathematics & Statistics.

Amjad Ali & M. Ali Choudhary & Shah Hussain & Vasco J. Gabriel, 2012. "Bank Lending and Monetary Shocks: an Empirical Investigation," School of Economics Discussion Papers 0212, School of Economics, University of Surrey.

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