# 6. Conclusions

The GFC of 2007–09 revived an old debate in the economics profession about the importance of macro-financial linkages. Some argue that the crisis was a painful reminder of our limited knowledge of such linkages. Others claim that the profession has already made substantial progress in understanding them but that there is too much emphasis on certain approaches and modelling choices.<sup>76</sup> At the centre of the macro-financial nexus lies the relationship between asset prices and macroeconomic outcomes. A long-held view among some academics, market participants and policymakers is that asset prices are set in an efficient manner by market forces, which helps guide the allocation of resources among competing projects. However, the apparent disconnect between asset prices, fundamentals, market volatility and other phenomena, on the one hand, and the predictions of standard models, on the other, has led many to question the “efficient markets” framework, especially after the GFC. A broad review of “what we know” and “what we do not know” about the linkages between asset prices and macroeconomic outcomes is thus called for.

This paper provides a survey of the literature on the linkages between asset prices and macroeconomic outcomes, which is the natural starting point for an analysis of macrofinancial relationships. Since the literature covers a wide array of topics, there are many caveats associated with a survey like ours. In light of these caveats, our survey focuses on a small set of specific questions. First, what are the basic theoretical linkages between asset prices and macroeconomic outcomes? Second, what is the empirical evidence supporting these linkages? Third, what are the main challenges to the theoretical and empirical findings? We analyse these questions in the context of the following asset price categories: equity prices, house prices, exchange rates and interest rates. In this section, we first summarise our answers to these three questions. We then offer pointers about promising avenues for future research.

## What are the main takeaways?

Basic theoretical mechanisms. A broad lesson of the survey is that standard models provide elegant benchmarks that allow the main mechanisms between asset prices and macroeconomic variables to be analysed. Asset prices play a significant role in determining the allocation of real and financial resources. They influence consumption, saving and investment decisions 76 We presented some quotes reflecting the tenor of the debate at the beginning of the survey. Krugman (2009a) criticises the macroeconomics literature because of its failure to recognise the strong relationship between the financial sector and the real economy while Cochrane (2011a) provides a critical response to Krugman’s views. Kocherlakota (2010), Caballero (2010), Romer (2016) and Reis (2017) assess the state of research on macroeconomics, but arrive at different conclusions. Blanchard (2017a) looks at the state of macroeconomics, focusing on the need to include distortions other than nominal price rigidities, including financial frictions. For perspective, Blanchard (2000, 2009) and Mankiw (2006) provide general reviews of the state of macroeconomics before the GFC. Many others, including Bernanke (2010), Blanchard et al (2010, 2013), Woodford (2010a), Taylor (2011), Turner (2012), Borio (2014), Claessens et al (2014a), Kose and Terrones (2015) and Blanchard and Summers (2017) and several papers in the Fall 2010 issue of the Journal of Economic Perspectives look at how the GFC may have influenced research. These and other reviews cover a broader set of issues than macro-financial linkages and the intersection between macroeconomics and finance (see for example Gopinath (2017) who provides a review of the recent macroeconomic policy-related work in international economics). In addition, contributions have taken a broader perspective on how economic policies have been reassessed (Blanchard et al (2012, 2016) and Akerlof et al (2014)).

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