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The failure of financial macroeconomics and what to do about it

  • Chatelain, Jean-Bernard
  • Ralf, Kirsten

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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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 38474.

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Date of creation: 01 May 2012
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Handle: RePEc:pra:mprapa:38474
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