A Macroeconomic Model with a Financial Sector
American Economic Review
vol. 104,
no. 2, February 2014
(pp. 379-421)
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.Citation
Brunnermeier, Markus K., and Yuliy Sannikov. 2014. "A Macroeconomic Model with a Financial Sector." American Economic Review, 104 (2): 379-421. DOI: 10.1257/aer.104.2.379Additional Materials
JEL Classification
- E13 General Aggregative Models: Neoclassical
- E32 Business Fluctuations; Cycles
- E44 Financial Markets and the Macroeconomy
- E52 Monetary Policy
- G01 Financial Crises
- G12 Asset Pricing; Trading Volume; Bond Interest Rates
- G20 Financial Institutions and Services: General