Sets the stage by providing a background on financial systems and financial frictions in middle-income countries, how they affect the transmission mechanisms of monetary and macroprudential policies, as well as the implications of these frictions for the design of macroeconomic models. A brief review of the core dynamic stochastic general equilibrium (DSGE) model, and some extensions with financial frictions, is also provided. The role of these models as exploratory platforms is also emphasized. The chapter concludes with a description of the modeling approach adopted in this book.