Macro-Financial Dynamics: Theories, Empirical Methods, and Time Scales

While the orthodox neoclassical view sees the financial system as a mere reflection of the real side of the economy, many researchers—most prominently, Hyman Minsky—have stressed the potential instability of financial fluctuations and their pervasive effects on the real economic sector. This chapter reviews the literature on cyclical dynamics of financial aggregates, from the pioneer financial fragility theory of Hyman Minsky to the subsequent empirical work on the financial cycle that gained popularity over the last decade. We put special emphasis on outlining the different methodological approaches, estimation frameworks, and the complex interactions between heterogenous financial market agents and the macroeconomy.