A working paper published by the European Central Bank offers a way of modelling the effect of banks’ lending standards on the real economy.

In Lending standards and macroeconomic dynamics, Pedro Gete adds bank lending standards into the way that standard dynamic stochastic general equilibrium models deal with financial frictions. Adding lending standards increases the realism of the standard DGSE model, Gete argues, by adding more financial mechanisms that can amplify the effects of economic