Much of how we think about and monitor financial stability at the Federal Reserve is informed by our understanding of how shocks can propagate across financial markets and affect the economy.
Economists have studied the role of debt in the macroeconomy dating all the way back to Irving Fisher in the 1930s, and in the past 40 years it has been well established that financial disruptions can reduce the efficiency of credit allocation and have real effects on the broader economy.3 When borrowers’ financial conditions deteriorate, lenders tend to charge higher rates on loans.