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realities. In particular, we need models that recognize that a market-based financial
cial system—one in which intermediaries fund themselves by selling securities in
competitive markets, rather than collecting deposits subject to reserve requirements—is not the same as a frictionless system.
I then sketch the basic elements of an approach that allows financial intermediation
mediation and credit frictions to be integrated into macroeconomic analysis in a
straightforward way. I show how the model can be used to analyze the macroeconomic
nomic consequences of the recent financial crisis and conclude with a discussion of
some implications of the model for the conduct of monetary policy. Michael
Michael Woodford is the John Bates Clark Professor of Political Economy, Columbia University,
sity, New York City, New York. His e-mail address is 〈email@example.com〉.
■ doi=10.1257/jep.24.4.21 22 Journal of Economic Perspectives Why a New Framework for Macroeconomic Analysis is Needed
It may be useful first to review why familiar macroeconomic models do not
already incorporate the features needed to make sense of rece...
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