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The Failure of Financial Macroeconomics and What to Do About it

  • Jean-Bernard Chatelain


    (Axe Institutions - EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS)

  • Kirsten Ralf


    (Ecole Supérieure du Commerce Extérieur - ESCE - International business school)

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 stylized facts 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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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00706777.

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Date of creation: May 2012
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Handle: RePEc:hal:cesptp:halshs-00706777
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