Macroeconomics with Financial Frictions: A Survey


Brunnermeier, Markus K, Thomas Eisenbach, and Yuliy Sannikov. “Macroeconomics with Financial Frictions: A Survey”. Advances in Economics and Econometrics, Tenth World Congress of the Econometric Society. New York: Cambridge University Press, 2013. Print.
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Macroeconomics with Financial Frictions: A Survey


This article surveys the macroeconomic implications of financial frictions. Financial frictions lead to persistence and when combined with illiquidity to non-linear amplification eects. Risk is endogenous and liquidity spirals cause financial instability. Increasing margins further restrict leverage and exacerbate the downturn. A demand for liquid assets and a role for money emerges. The market outcome is generically not even constrained ecient and the issuance of government debt can lead to a Pareto improvement. While financial institutions can mitigate frictions, they introduce additional fragility and through their erratic money creation harm price stability.

Last updated on 07/16/2014