A Macroeconomic Model with a Financial Sector
Markus K. Brunnermeier, Yuliy Sannikov
American Economic Review · 2014 · Volume 104 · Issue 2
Abstract
This article studies the full equilibrium dynamics of an economy with financial frictions. Due to highly nonlinear amplification effects, the economy is prone to instability and occasionally enters volatile crisis episodes. Endogenous risk, driven by asset illiquidity, persists in crisis even for very low levels of exogenous risk. This phenomenon, which we call the volatility paradox, resolves the Kocherlakota (2000) critique. Endogenous leverage determines the distance to crisis. Securitization and derivatives contracts that improve risk sharing may lead to higher leverage and more frequent crises.
Keywords
General Aggregative Models: Neoclassical, Business Fluctuations, Cycles, Financial Markets and the Macroeconomy, Monetary Policy, Financial Crises, Asset Pricing, Trading Volume, Bond Interest Rates, Financial Institutions and Services: General
Enable JavaScript for citation tools and additional paper interactions.