Abstract
I review two examples that show how the nature of the financial system can play a central role in shaping the behavior of the aggregate economy. In the first example, variations over time in the cross-sectional dispersion of a productivity shock, which would have no aggregate effect in a frictionless model, produce effects that look like business cycles because of the nature of financial (and nominal) frictions. The second example suggests how a shock originating outside the financial system, which ordinarily might not be expected to have a large aggregate effect, can lead to a systemic banking collapse. The relevance of the examples to the US economy is discussed.
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