The study analyzed the effects of financial shocks on economic fluctuations using a New Keynesian DSGE model. By incorporating incomplete financial markets and considering the substitutability between debt and equity financing, the researchers found that financial shocks play a significant role in economic volatility. Debt financing is pro-cyclical, while equity financing is counter-cyclical. Financial shocks were identified as the main driver of income and inflation volatility. Moreover, higher tax rates and discount factors amplify the impact of financial shocks on overall economic volatility. Historical simulations showed that a significant portion of past economic downturns were explained by negative financial shocks, along with other factors like technology and investment shocks.