Credit Crunch

Working Papers
Brunnermeier, Markus K., and Ricardo Reis. “A Crash Course on the Euro Crisis”. (Working Papers). Print.Abstract

The financial crises of the last twenty years brought new economic concepts into classrooms discussions. This article introduces undergraduate students and teachers to seven of these models: (i) misallocation of capital inflows, (ii) modern and shadow banks, (iii) strategic complementarities and amplification, (iv) debt contracts and the distinction between solvency and liquidity, (v) the diabolic loop, (vi) regional flights to safety, and (vii) unconventional monetary policy. We apply each of them to provide a full account of the euro crisis of 2010-12.

19-crashcourse.pdf brunnermeierreis-crashcourse-sec2.pptx brunnermeierreis-crashcourse-sec3.pptx brunnermeierreis-crashcourse-sec4.pptx brunnermeierreis-crashcourse-sec5.pptx brunnermeierreis-crashcourse-sec6.pptx brunnermeierreis-crashcourse-sec7.pptx brunnermeierreis-crashcourse-sec8.pptx
Forthcoming
Brunnermeier, Markus K.Feedbacks: Financial Markets and Economic Activity”. American Economic Review (Forthcoming). Print.Abstract
Is credit expansion a sign of desirable financial deepening or the prelude to an inevitable bust? We study this question in modern US data using a structural VAR model of 10 monthly-frequency variables, identified by heteroskedasticity. Negative reduced-form responses of output to credit growth are caused by endogenous monetary policy response to credit expansion shocks. On average, credit and output growth remain positively associated. “Financial stress” shocks to credit spreads cause declines in output and credit levels. Neither credit aggregates nor spreads provide much advance warning of the 2008-9 crisis, but spreads improve within-crisis forecasts.
04brunnermeierdariussaskisims.pdf
2013
Bubbles, Financial Crises, and Systemic Risk
Brunnermeier, Markus K, and Martin Oehmke. “Bubbles, Financial Crises, and Systemic Risk”. Handbook of the Economics of Finance. Amsterdam: Elsevier, 2013. Print.Abstract

This chapter surveys the literature on bubbles, financial crises, and systemic risk. The first part of the chapter provides a brief historical account of bubbles and financial crisis. The second part of the chapter gives a structured overview of the literature on financial bubbles. The third part of the chapter discusses the literatures on financial crises and systemic risk, with particular emphasis on amplification and propagation mechanisms during financial crises, and the measurement of systemic risk. Finally, we point toward some questions for future research.

Bubbles, Financial Crisis and Systemic Risk.pdf
Brunnermeier, Markus K, and Yuliy Sannikov. “Redistributive Monetary Policy”. Jackson Hole Symposium 2013331-384. Web. Publisher's VersionAbstract

Liquidity and deflationary spirals self-generate endogenous risk and redistribute wealth. Monetary policy can mitigate these effects and help rebalance wealth after an adverse shock, thereby reducing endogenous risk, stabilizing the economy, and stimulating growth. The redistributive channel differs from the classic Keynesian interest rate channel in models with price stickiness. Central banks assume and redistribute tail risk when purchasing assets or relaxing their collateral requirements. Monetary policy (rules) can be seen as a social insurance scheme for an economy beset by financial frictions. As with any insurance, it carries the cost of moral hazard. Redistributive monetary policy should be strictly limited to undoing the redistribution caused by the amplification effects and by moral hazard considerations.

Jackson Hole 2012 Presentation.pdf Redistributive Monetary Policy.pdf Three Stability Concepts.pdf
2009
Brunnermeier, Markus K. “Deciphering the Liquidity and Credit Crunch 2007-2008”. Journal of Economic Perspectives 23 (2009): , 23, 77-100. Print.Abstract

This paper summarizes and explains the main events of the liquidity and credit crunch in 2007-08. Starting with the trends leading up to the crisis, I explain how these events unfolded and how four different amplification mechanisms magnified losses in the mortgage market into large dislocations and turmoil in financial markets.

liquidity_credit_crunch.pdf liquidity_crunch_2007_08_slides.pdf liquidity_credit_crunch_nber.pdf