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

This paper provides a template for teaching the Euro crisis. It starts by stressing the importance of international capital flows that primarily fueled sectors with low productivity in the periphery. A key element of the crisis is that international capital flows were intermediated by banks and that most European banks rely heavily on less stable short-term wholesale funding. A sudden stop of this funding flows leads to fire-sales and a credit crunch. This is worsened by the ''diabolic loop'' between sovereign and banking risk. The paper addresses various liquidity policy measures and argues that insolvency issues are not addressed since fiscal authorities and monetary authority play a game of chicken about who should absorb the losses.

01b EuroCrashCourse_slides.pdf
Brunnermeier, Markus K, and Yuliy Sannikov. “International Credit Flows and Pecuniary Externalities”. American Economic Journal: Macroeconomics 71 (2015): , 7, 1, 297-338. Print.Abstract

This paper develops a dynamic two-country neoclassical stochastic growth model with incomplete markets. Short-term credit flows can be excessive and reverse suddenly. The equilibrium outcome is constrained inefficient. First, an undercapitalized country borrows too much since each individual firm does not internalize that an increase in production capacity undermines their output price and thereby worsens their terms of trade. From an ex-ante perspective each firm undermines the natural \lq\lq{}terms of trade hedge.\rq\rq{} Second, sudden stops and fire sales lead to sharp price drops of illiquid physical capital, another pecuniary externality. The analysis also provides a full characterization of the endogenous volatility dynamics and welfare. Imposing capital controls or other domestic macro-prudential policy measures that limit short-term borrowing can improve welfare.

InternationalCreditFlows.pdf InternationalCreditFlows_slides.pdf
Brunnermeier, Markus K. “Optimizing the Currency Area”. The Great Financial Crisis: Lesssons for Financial Stability and Monetary Policy 2010: , 14-22. Print. ECB Colloquium 2010.pdf slides.pdf
Brunnermeier, Markus K, Stefan Nagel, and Lasse H Pedersen. “Carry Trades and Currency Crashes”. Ed. Kenneth Rogoff, Michael Woodford, & Daron Acemoglu. NBER Macroeconomics Annual 2008 23 (2008): , 23, 313-347. Print.Abstract


carry_trades_currency_crashes_slides.pdf carry_trades_currency_crashes.pdf

Currency crash risk caused by sudden unwinding of carry trades may discourage speculators from taking on large enough positions to enforce UIP.

Brunnermeier, Markus K. “Contrasting Different Forms of Price Stickiness: An Analysis of Exchange Rate Overshooting and the Beggar Thy Neighbour Policy”. 1999: n. pag. Print.Abstract

This paper considers a two country economy similar to that in Obstfeld and Rogoff (1995). We build on their model by distinguishing between sticky retail prices, sticky wholesale prices and sticky wages. We find that conclusions about whether monetary shocks lead to exchange rate overshooting and spillovers on foreign production and consumption depend crucially on the form of price stickiness assumed in the economy. Sticky retail prices not only allow for a profitable Beggar Thy Neighbour Policy but also lead to exchange rate overshooting. Although the outcome is similar to the seminal work by Dornbusch (1976), the driving force in our model is quite different. With sticky retail prices, the exchange rate overshoots even though the interest rate parity may not even hold in equilibrium. These results are in sharp contrast to the outcomes under the sticky wholesale prices scenario wherein prices are fixed in the producers currency. Contrary to the spirit of the Beggar Thy Neighbour Policy, an unexpected money expansion benefits inhabitants in the other country as well. The interest rate parity always hold in equilibrium and there is no exchange rate overshooting.