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A Macroeconomic Model with a Financial Sector

Yuliy Sannikov and Markus Brunnermeier

No 1114, 2010 Meeting Papers from Society for Economic Dynamics

Abstract: This paper studies a macroeconomic model in which financial experts borrow from less productive agents in order to invest in financial assets. We pursue three set of results: (i) Going beyond a steady state analysis, we show that adverse shocks cause amplifying price declines not only through the erosion of net worth of the financial sector, but also through increased price volatility, leading to precautionary hoarding and fire sales. (ii) Financial sector’s leverage and maturity mismatch is excessive, since it does not internalize externalities it imposes on the labor sector and other financial experts due to a fire-sale externality. (iii) Securitization, which allows the financial sector to offload some risk, exacerbates the excessive risk-taking.

Date: 2010
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Journal Article: A Macroeconomic Model with a Financial Sector (2014) Downloads
Working Paper: A macroeconomic model with a financial sector (2012) Downloads
Working Paper: A Macroeconomic Model with a Financial Sector (2012) Downloads
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