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 amplication effects, the economy is prone to instability and occasionally enters volatile episodes. Risk is endogenous and asset price correlations are high in downturns. 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 by not maintaining adequate capital cushion.
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Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 507.
Date of creation: 2012
Date of revision:
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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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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.
- Markus K. Brunnermeier & Yuliy Sannikov, 2012. "A macroeconomic model with a financial sector," Working Paper Research 236, National Bank of Belgium.
- NEP-ALL-2013-04-13 (All new papers)
- NEP-BAN-2013-04-13 (Banking)
- NEP-DGE-2013-04-13 (Dynamic General Equilibrium)
- NEP-MAC-2013-04-13 (Macroeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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- Markus K. Brunnermeier & Thomas M. Eisenbach & Yuliy Sannikov, 2012.
"Macroeconomics with Financial Frictions: A Survey,"
Levine's Working Paper Archive
786969000000000384, David K. Levine.
- Shin, Hyun Song, 2010. "Risk and Liquidity," OUP Catalogue, Oxford University Press, number 9780199546367.
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- Vasco Cúrdia & Michael Woodford, 2009.
"Credit Spreads and Monetary Policy,"
0910-01, Columbia University, Department of Economics.
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