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The Failure Of Financial Macroeconomics And What To Do About It

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  • JEAN-BERNARD CHATELAIN
  • KIRSTEN RALF

Abstract

The bargaining power of international banks is currently still very high as compared to what it was at the time of the Bretton Woods conference. As a consequence, systemic financial crises are likely to remain recurrent phenomena with large effects on macroeconomic aggregates. Mainstream macroeconomic models dealing with financial frictions failed to explain at least eight features of the ongoing crisis. We therefore suggest two complementary assumptions: (I) A systemic bankruptcy risk stable equilibrium may be feasible, besides another stable equilibrium related to a stability corridor, (II) inefficient financial markets rarely ensure that the price of an asset is equal to its “fundamental long term value”. Both assumptions are compatible with a structural research programme taking into account the Lucas' critique (1976) but may start a creative destruction process of the Lucas' view of business cycles theory.

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Bibliographic Info

Article provided by University of Manchester in its journal The Manchester School.

Volume (Year): 80 (2012)
Issue (Month): (09)
Pages: 21-53

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Handle: RePEc:bla:manchs:v:80:y:2012:i::p:21-53

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  29. repec:hal:journl:halshs-00112535 is not listed on IDEAS
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Cited by:
  1. Karim Azizi & Nicolas Canry & Jean-Bernard Chatelain & Bruno Tinel, 2013. "Government Solvency, Austerity and Fiscal Consolidation in the OECD: A Keynesian Appraisal of Transversality and No Ponzi Game Conditions," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00825446, HAL.
  2. Jean-Bernard, Chatelain, 2013. "Book review: “The Challenge of Financial Stability: A New Model and its Applications” by Goodhart C.A.E. and Tsomocos D.P," MPRA Paper 45678, University Library of Munich, Germany.
  3. Karim Azizi & Nicolas Canry & Jean-Bernard Chatelain & Bruno Tinel, 2012. "Are No-Ponzi Game and Transversality Conditions Relevant for Public Debt? A Keynesian Appraisal," Working Papers wp296, Political Economy Research Institute, University of Massachusetts at Amherst.
  4. Jean-Bernard Chatelain, 2013. "Goodhart, Charles A.E. and Tsomocos, Dimitros P.: The challenge of financial stability: a new model and its applications," Journal of Economics, Springer, vol. 109(2), pages 201-205, June.
  5. repec:hal:wpaper:hal-00818474 is not listed on IDEAS

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