A macroeconomic model with a financial sector
AbstractThis paper studies the full equilibrium dynamics of an economy with financial frictions. Due to highly non-linear amplification effects, the economy is prone to instability and occasionally enters volatile episodes. Risk is endogenous and asset price correlations are high in down turns. In an environment of low exogenous risk experts assume higher leverage making the system more prone to systemic volatility spikes - a volatility paradox. Securitization and derivatives contracts leads to better sharing of exogenous risk but to higher endogenous systemic risk. Financial experts may impose a negative externality on each other and the economy by not maintaining adequate capital cushion.
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Bibliographic InfoPaper provided by National Bank of Belgium in its series Working Paper Research with number 236.
Length: 75 pages
Date of creation: Oct 2012
Date of revision:
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Other versions of this item:
- Yuliy Sannikov & Markus K. Brunnermeier, 2010. "A Macroeconomic Model with a Financial Sector," 2010 Meeting Papers 1114, Society for Economic Dynamics.
- Yuliy Sannikov & Markus Brunnermeier, 2012. "A Macroeconomic Model with a Financial Sector," 2012 Meeting Papers 507, Society for Economic Dynamics.
- NEP-ALL-2012-10-20 (All new papers)
- NEP-BAN-2012-10-20 (Banking)
- NEP-DGE-2012-10-20 (Dynamic General Equilibrium)
- NEP-MAC-2012-10-20 (Macroeconomics)
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