When Nightmares Become Real: Modelling Linkages between the Financial Sector and the Real Economy in the Aftermath of the Financial Crisis

Our understanding of the links between the financial sector and the rest of the economy needs to improve concludes this report. The authors say that the complexity of these linkages have been neglected in the models typically used to guide monetary policy – the question is how to remedy deficiencies in policymakers’ economic models of the world, so that they can be used with confidence in guiding policy. The need to factor in a rich representation of the linkages between the financial sector and the real economy is also critically important to determining the extent to which monetary policy can, or should, be used to counteract the buildup of systemic risk in the financial system, the key issue from a policy framework perspective.