Financial Frictions in Macroeconomic Fluctuations

The key ideas for adding financial market frictions in general equilibrium models are not new in macroeconomics. However, it is only with the recent crisis that the profession has fully recognized the importance of financial markets for business cycle fluctuations. In this article I review some of the most popular ideas proposed in the literature and I show how the modeling of financial frictions helps us understand several dynamic features of the macroeconomy.