Macroeconomics with Financial Frictions: A Survey

96 Pages Posted: 1 Jun 2012 Last revised: 18 Dec 2024

See all articles by Markus K. Brunnermeier

Markus K. Brunnermeier

Princeton University - Department of Economics

Thomas M. Eisenbach

Federal Reserve Banks - Federal Reserve Bank of New York

Yuliy Sannikov

Stanford GSB

Date Written: May 2012

Abstract

This article surveys the macroeconomic implications of financial frictions. Financial frictions lead to persistence and when combined with illiquidity to non-linear amplification effects. Risk is endogenous and liquidity spirals cause financial instability. Increasing margins further restrict leverage and exacerbate downturns. A demand for liquid assets and a role for money emerges. The market outcome is generically not even constrained efficient 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.

Suggested Citation

Brunnermeier, Markus Konrad and Eisenbach, Thomas M. and Sannikov, Yuliy, Macroeconomics with Financial Frictions: A Survey (May 2012). NBER Working Paper No. w18102, Available at SSRN: https://ssrn.com/abstract=2071506

Markus Konrad Brunnermeier (Contact Author)

Princeton University - Department of Economics ( email )

Bendheim Center for Finance
Princeton, NJ
United States
609-258-4050 (Phone)
609-258-0771 (Fax)

HOME PAGE: http://www.princeton.edu/¡­markus

Thomas M. Eisenbach

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-6089 (Phone)

HOME PAGE: http://teisenbach.github.io/

Yuliy Sannikov

Stanford GSB ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

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