 The financial system and the natural real interest rate: towards a ‘new benchmark theory model’Oxford Review of Economic Policy, 2018, vol. 34, issue 1-2, 252-268 Abstract: The 2008 financial crisis revealed serious flaws in the models that macroeconomists use to research, inform policy, and teach graduate students. In this paper we seek to find simple additions to the existing benchmark model that might let us answer three questions. What caused the boom and crisis? Why has the recovery been slow? And, how should policy respond to that slow recovery? We argue that it is necessary to add financial frictions to the benchmark model. This allows us to study the effects of leveraged financial institutions, and of a yield curve based on preferred habitats. Such features will cause endogenous changes in the natural real interest rate and the spread between that interest rate and the rate which influences expenditure decisions. They are likely to radically change the way in which the model responds to shocks. We point to some promising models that incorporate these features. Keywords: credit frictions; dynamic stochastic general equilibrium; theory; natural real interest rate; risk premia (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:oup:oxford:v:34:y:2018:i:1-2:p:252-268. Access Statistics for this article Oxford Review of Economic Policy is currently edited by Christopher Adam More articles in Oxford Review of Economic Policy from Oxford University Press and Oxford Review of Economic Policy Limited |
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