Abstract: After the Subprime Crisis, the role of financial frictions in economic growth and business cycle fluctuations has aroused great social attention. Based on a new Keynes DSGE model with the financial intermediary sector, the paper quantitively describes the influence mechanism of financial frictions on China′s business cycle fluctuations in New Normal. Research finds financial frictions could accelerate and amplify financial shocks through the balance sheet channel, and financial friction coefficient is inversely related to the business fluctuation multiplier effect; the capital quality shock has a long-term impact on business cycle fluctuations,but the monetary policy is only available in the short-term, which suggest that as long as the financial frictions exist, the monetary policy would have less effects on financial shocks. Relevant departments should not only depend on monetary policy for short-term regulation, but also focus on the characteristics of China capital market development and improve its management to maximize the role of virtual economy in optimizing the allocation of resources, and thus promote the recovery of real economy.

Key words: New Normal, financial frictions, business cycle fluctuations, DSGE model