The integration of the financial system in macroeconometric models for policy simulation

The objective of this paper is to provide a survey on the role of financial factors in macroecono-metric models for policy simulation. We fi rst describe how the failure of existing models to predict the fi nancial crises and characterize its transmission mechanisms has led to important advances in mainstream modelling approach, with a prominent role assigned to nancial intermediation. We then use the lens of a Stock-Flow Consistent model developed at the Italian Department of Treasury to illustrate the centrality of sectoral balance sheets in this approach and assess its ability to capture some of the patterns observed during the financial crisis. Our discussion is made taking as reference the criticisms posed to DSGE modelling after both the subprime loans and Euro-area sovereign debt crises. JEL codes: E60, C54.