Analysis of Macrofinancial Linkages

Macrofinancial linkages focus on macroeconomic and sectoral implications of financial instability, and they derive from the many ways in which different nonfinancial sectors rely on intermediation by the financial sector to conduct their activities. Those linkages differ significantly across countries, but they are likely to include (a) the dependence of nonfinancial sectors (e. g., corporate, household, and government sector) on financing by domestic and foreign banks; (b) the deposits and wealth of those sectors placed with the financial sector that would be at risk in a financial crisis; (c) the role of the banking system on monetary policy transmission; and (d) the financial sector’s holdings of securi­ties issued by, and loans to, the government so that problems in the financial sector could adversely affect debt sustainability. Thus, the monitoring of financial sector vulnerabilities using FSIs should be combined with an analysis of other data on macrofinancial linkages to assess the effect of shocks on macroeconomic conditions through the financial sector.

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