A Macroeconomic Model with a Financial Sector

2014/02/01 by Markus K. Brunnermeier, Yuliy Sannikov · 6 citations
Economics, Econometrics and Finance · #Economic theories and models #Banking stability, regulation, efficiency #Global Financial Crisis and Policies

paper · doi:10.1257/aer.104.2.379

openalex publication_date 2014/02/01 · openalex created_date 2025/10/10 · openalex updated_date 2026/08/04

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 E13, E32, E44, E52, G01, G12, G20)

Citations

• Financial Intermediation, Loanable Funds, and The Real Sector
• A Continuous-Time Version of the Principal–Agent Problem
• Financial Intermediation and Delegated Monitoring
• The I Theory of Money
• Increasing Returns and Long-Run Growth
• Theory of the firm: Managerial behavior, agency costs and ownership structure
• A Model of Capital and Crises
• International Credit Flows and Pecuniary Externalities
• Credit Cycles

Cited by

• The I Theory of Money
• Learning from History: Volatility and Financial Crises
• How Competitive Is the Stock Market? Theory, Evidence from Portfolios, and Implications for the Rise of Passive Investing
• Credit Crises, Precautionary Savings, and the Liquidity Trap*
• Markus Brunnermeier [wikipedia]
• Yuliy Sannikov [wikipedia]