The Transmission Channels between Financial Sector and Real Economy in Light of the Current Financial Crisis a Critical Survey of the Literature

Abstract

The present study undertakes a critical review of the research around the major issue of the transmission channels between financial sector and real economy. The aim of the study is to shed light on the interaction between the financial system and the economy, in the shadow of the current crisis. The literature documents the importance of these channels in the determination of economic activity and therefore, real economy as a whole. The study highlights the emergence of the liquidity channel as a key factor of the transmission of bank credit shocks to real economy and underlines the existing "regulation gaps". The paper concludes that the financial sector plays an even more crucial role these days and drastic measures along with intense supervision must be undertaken so as to work properly and serve the economic world.