A Macroeconomic Model with a Financial Sector

Markus Brunnermeier and Yuliy Sannikov

American Economic Review, 2014, vol. 104, issue 2, 379-421

Abstract: This article studies the full equilibrium dynamics of an economy with financial frictions. Due to highly nonlinear amplification effects, the economy is prone to instability and occasionally enters volatile crisis episodes. Endogenous risk, driven by asset illiquidity, persists in crisis even for very low levels of exogenous risk. This phenomenon, which we call the volatility paradox, resolves the Kocherlakota (2000) critique. Endogenous leverage determines the distance to crisis. Securitization and derivatives contracts that improve risk sharing may lead to higher leverage and more frequent crises.

JEL-codes: E13 E32 E44 E52 G01 G12 G20 (search for similar items in EconPapers)
Date: 2014
Note: DOI: 10.1257/aer.104.2.379
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Citations: View citations in EconPapers (944)

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Related works:
Working Paper: A macroeconomic model with a financial sector (2012)
Working Paper: A Macroeconomic Model with a Financial Sector (2012)
Working Paper: A Macroeconomic Model with a Financial Sector (2010)
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