A recent suggestion was to be able to model changes in financial frictions coming from deregulation of financial markets. A reduced form way to capture this may be to have a friction parameter that increases the cost of capital for firms, but doesn't directly impact the interest rate households receive.
One would want to allow this parameter to vary over time, $t$, and production industry, $m$.
Something to think about is whether this friction represents a pure economic loss (e.g., because of informational asymmetries in financial markets) or if it's a rent captured by financial intermediaries (e.g., due to market power). The choice would affect whether incurred costs from financial frictions would enter the resource constraint directly or if they would be transfers to households (who own the financial intermediaries).
A recent suggestion was to be able to model changes in financial frictions coming from deregulation of financial markets. A reduced form way to capture this may be to have a friction parameter that increases the cost of capital for firms, but doesn't directly impact the interest rate households receive.
One would want to allow this parameter to vary over time,$t$ , and production industry, $m$ .
Something to think about is whether this friction represents a pure economic loss (e.g., because of informational asymmetries in financial markets) or if it's a rent captured by financial intermediaries (e.g., due to market power). The choice would affect whether incurred costs from financial frictions would enter the resource constraint directly or if they would be transfers to households (who own the financial intermediaries).