A macroeconomic model with a financial sector

Markus Brunnermeier and Yuliy Sannikov ()
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Yuliy Sannikov: Department of Economics, Princeton University

No 236, Working Paper Research from National Bank of Belgium

Abstract: This 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.

Pages: 75 pages
Date: 2012-10
New Economics Papers: this item is included in nep-ban, nep-dge and nep-mac
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Citations: View citations in EconPapers (75)

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Related works:
Journal Article: A Macroeconomic Model with a Financial Sector (2014)
Working Paper: A Macroeconomic Model with a Financial Sector (2012)
Working Paper: A Macroeconomic Model with a Financial Sector (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:nbb:reswpp:201210-236

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