Macroeconomics with Financial Frictions: A Survey

Markus Brunnermeier, Thomas Eisenbach and Yuliy Sannikov

No 18102, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This article surveys the macroeconomic implications of financial frictions. Financial frictions lead to persistence and when combined with illiquidity to non-linear amplification effects. Risk is endogenous and liquidity spirals cause financial instability. Increasing margins further restrict leverage and exacerbate downturns. A demand for liquid assets and a role for money emerges. The market outcome is generically not even constrained efficient and the issuance of government debt can lead to a Pareto improvement. While financial institutions can mitigate frictions, they introduce additional fragility and through their erratic money creation harm price stability.

JEL-codes: A23 E1 E3 E4 E5 G01 G1 G2 (search for similar items in EconPapers)
Date: 2012-05
New Economics Papers: this item is included in nep-ban, nep-dge, nep-mac and nep-mon
Note: AP CF EFG IFM ME
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Citations: View citations in EconPapers (210)

Published as “Macroeconomics with Financial Frictions: A Survey” (with Thomas Eisenbach and Yuliy Sannikov), in Daron Acemoglu, Manuel Arellano and Eddie Dekel (eds.), Advances in Economics and Econometrics, Tenth World Congress of the Econometric Society, Vol. II: Applied Economics, Cambridge University Press, New York, 2013, pp. 4-94.

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Working Paper: Macroeconomics with Financial Frictions: A Survey (2012)
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