financial system, show its importance as a channel of monetary transmission. Other work shows that the potency of the bank capital channel varies over business and financial cycles (especially during credit crunches). Recent work also examines the procyclical nature of financial system leverage, asset prices and liquidity, providing evidence relating to their impact on real aggregates, especially in times of financial stress.

In addition, a number of empirical studies on aggregate macro-financial linkages document the importance of developments in financial markets for the real economy. In particular, cycles in various financial market segments (equity, housing and credit) appear to play an important role in shaping recessions and recoveries. Recessions associated with financial disruptions are often longer and deeper than other recessions while, conversely, recoveries associated with rapid growth in credit and house prices tend to be relatively stronger.

# What next?

The topic of macro-financial linkages promises to remain an exciting area of research, given the many open questions and significant policy interest. A list of potential future areas of research, by no means exhaustive, is provided next.

Data issues. There are large data gaps. The lack of adequate time series data on important financial and macroeconomic variables has been a severe limitation for researchers. Although the prices of many traded assets are widely available (including for equities and bonds), gaps remain with respect to higher frequency and longer-dated series relating to the housing market and aggregate credit. Comprehensive cross-country databases pertaining to business and financial cycles have only recently been constructed. Researchers would also benefit from better access to granular data on external financing and credit, and on the balance sheets of firms, banks and other financial intermediaries. Such data are essential to the exploration of the links between the financial sector and the real economy and to the assessment of the systemic risks that can arise from these linkages (see the papers collected in Brunnermeier and Krishnamurthy (2014) on the general data needs required for research on macro-financial linkages).

Data deficiencies are especially significant at the international level. There is a dearth of information at the aggregate and granular levels about bilateral exposures – between two countries as well as between two financial institutions, the cross-border activities of banks, institutional investors, hedge funds and other market participants (see further Cerutti et al (2014), Borio (2013), Tarashev et al (2016) and Heath and Bese Goksu (2017)). Moreover, existing data sources are often not comparable because they are compiled under different regimes. While some recent data collection efforts have been underway, such as those under the G20 Data Gap Initiative (FSB-IMF (2016)), progress in this area has been slow, including on obtaining data on the world’s largest financial institutions, the so-called global systemically important financial institutions (G-SIFIs).

Demand side channels. Although research on the demand side channels is much richer than that on the supply side, many questions remain open. DSGE models, including those with financial market imperfections and financial accelerator-type amplification mechanisms, have been widely used by policy institutions. Yet, when calibrated with reasonable parameters and tested with realistic shocks, the quantitative importance of the financial accelerator in explaining real activity appears to be limited. Models still face difficulties in accounting for heterogeneity among agents and for the asymmetries and non-linearities that arise from macro-financial linkages, especially when adverse shocks hit borrowers’ net worth and curtail their access to external financing. Little attention has been devoted to the role of the debt 38