A Macroeconomic Model with a Financial Sector

Yuliy Sannikov and Markus Brunnermeier
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Yuliy Sannikov: Princeton University

No 507, 2012 Meeting Papers from Society for Economic Dynamics

Abstract: This paper studies the full equilibrium dynamics of an economy with financial frictions. Due to highly non-linear amplication effects, the economy is prone to instability and occasionally enters volatile episodes. Risk is endogenous and asset price correlations are high in downturns. 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 by not maintaining adequate capital cushion.

Date: 2012
New Economics Papers: this item is included in nep-ban, nep-dge and nep-mac
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Citations: View citations in EconPapers (77)

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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:red:sed012:507

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