Financial intermediaries and macroeconomics

Abstract

Financial intermediaries are the institutions that play the role of the connector between the savers and the investors. Retail banks, investment banks, and non-banking financial organizations are examples of financial intermediaries. Similarly, the interbank money market, the debt market, and the capital market are the important channels of financial intermediation. Traditional macroeconomic models assume that these markets are perfect and resilient. They are perfect in the sense they are always in equilibrium. Resilient because any imperfection, that occurs in these markets, gets corrected instantaneously. And this short-lived disequilibrium does not affect the real sector. But the Global Financial Crisis (GFC) of 2008 changed this assumption. Disequilibrium in the repo market persisted for a longer period. It also affected investment, output, and employment in the USA. After 2008 macroeconomists tried to incorporate the financial friction in traditional models.