The failure of Financial Macroeconomics and What to Do About It

Jean-Bernard Chatelain and Kirsten Ralf

Documents de travail du Centre d'Economie de la Sorbonne from Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne

Abstract: The bargaining power of international banks is currently still very high as compared to what it was at the time of the Bretton Woods conference. As a consequence, systemic financial crises are likely to remain recurrent phenomena with large effects on macroeconomic aggregates. Mainstream macroeconomic models dealing with financial frictions failed to explain at least eight features of the ongoing crisis. We therefore suggest two complementary assumptions: (I) A systemic bankruptcy risk stable equilibrium may be feasible, besides another stable equilibrium related to a stability corridor, (II) inefficient financial markets rarely ensure that the price of an asset is equal to its "fundamental long term value". Both assumptions are compatible with a structural research programme taking into account the Lucas' critique (1976) but may start a creative destruction process of the Lucas' view of business cycles theory

Keywords: Asset prices; liquidity trap; monetary policy; financial stability; business cycles; liquidity trap; dynamic stochastic general equilibrium models (search for similar items in EconPapers)
JEL-codes: E3 E4 E5 E6 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2012-05
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

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http://mse.univ-paris1.fr/pub/mse/CES2012/12030.pdf (application/pdf)

Related works:
Journal Article: THE FAILURE OF FINANCIAL MACROECONOMICS AND WHAT TO DO ABOUT IT (2012)
Working Paper: The Failure of Financial Macroeconomics and What to Do about It (2012)
Working Paper: The Failure of Financial Macroeconomics and What to Do About it (2012)
Working Paper: The Failure of Financial Macroeconomics and What to Do about It (2012)
Working Paper: The Failure of Financial Macroeconomics and What to Do About it (2012)
Working Paper: The Failure of Financial Macroeconomics and What to Do about It (2012)
Working Paper: The failure of financial macroeconomics and what to do about it (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:mse:cesdoc:12030

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