What is Financial Frictions? Ultimate Guide
To understand the role of financial friction in economic policy, we first need to define what it is. Essentially, financial friction is the difference between the marginal product of capital and the return a business can earn on that capital. It is often overlooked, but widening financial friction is bad news for businesses. In fact, the effects of widening financial friction were evident during the recent global financial crisis, when the rate of finance remained at historically high levels. The Great Depression saw a prolonged and severe economic downturn. Real output in the United States declined by more than 26%…