Financial Frictions and Macroprudential Policy

Incorporating financial intermediaries, with their ability to generate shocks and frictions, into macroeconomic models has recently gained substantial attention of the profession. In this commentary I ask whether the models we generated are ripe to provide valuable, quantitative advice to policymakers, especially those interested in implementing and conducting macroprudential policy. I concentrate on three features of standard DSGE models that, in my view, still make them hard to digest for policymakers: goals of macroprudential policy, assumed terms of lending, and spillovers.