Financial frictions and macroeconomic models: a tour d'horizon

The benchmark sticky-price microfounded model yielded a number of insights for monetary policymakers but failed to consider the implications arising from easy money and expanding credit and balance sheets. The promising search for a microfounded workhorse model of financial frictions is still in its early stages. And the ongoing global financial crisis poses a number of questions about both the fundamental causes of business cycle fluctuations and the extent to which monetary–fiscal and debt management policies should be jointly determined. I assess recent developments and provide some pointers for the micro-founded agenda.