A Macroeconomic Model with a Financial Sector
AbstractThis 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.
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Bibliographic InfoArticle provided by American Economic Association in its journal American Economic Review.
Volume (Year): 104 (2014)
Issue (Month): 2 (February)
Find related papers by JEL classification:
- E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- G01 - Financial Economics - - General - - - Financial Crises
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G20 - Financial Economics - - Financial Institutions and Services - - - General
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- YELLEN: Monetary Policy Shouldn't Change Because People Are Worried About Financial Stability
by Rob Wile in Business Insider on 2014-07-02 15:00:00
- Chair Janet L. Yellen: Monetary Policy and Financial Stability
by Guest Author in The Big Picture on 2014-07-03 09:00:18
- Thorsten Beck & Andrea Colciago & Damjan Pfajfar, 2014.
"The role of financial intermediaries in monetary policy transmission,"
DNB Working Papers
420, Netherlands Central Bank, Research Department.
- Beck, Thorsten & Colciago, Andrea & Pfajfar, Damjan, 2014. "The role of financial intermediaries in monetary policy transmission," Journal of Economic Dynamics and Control, Elsevier, vol. 43(C), pages 1-11.
- Josef Falkinger, 2014. "In search of economic reality under the veil of financial markets," ECON - Working Papers 154, Department of Economics - University of Zurich.
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