Financial friction is friction in the relationship between the real sector and the financial sector, which is caused by the financial sector. The financial sector has a role in facilitating activities in the real sector. The financial sector receives deposits of households and firms and channels them back in the form of financing. If there are shocks that impact the financial sector, or because of the condition of the financial sector itself, the volume of financing may not be in line with what is really needed by the economy. Too little financing volume makes the real sector experience difficulties in financing and disrupts its economic activity. Conversely, too much financing volume makes the economic activity of the real sector excessive.
Financial frictions occur due to shocks that disrupt the economic balance. The goods market and the money market (including the financing market and the financial market) were initially assumed to be in balance and the markets are efficient. However, due to shocks, the goods market and the money market may not be in balance. Unconformity in responding to the shocks and rigidity in the money market create financial frictions. In addition, financial frictions can also occur due to market inefficiency, which can be seen among others from the cost of financing that is too high or too low, as well as the creation of money in financing.