The Failure of Financial Macroeconomics and What to Do About It
28 Pages Posted: 19 Jul 2012
Date Written: July 20, 2012
The bargaining power of international banks is currently still very high as compared to what it was at the time of the Bretton Woods conference. As a consequence, systemic financial crises are likely to remain recurrent phenomena with large effects on macroeconomic aggregates. Mainstream macroeconomic models dealing with financial frictions failed to explain at least eight stylized facts of the ongoing crisis. We therefore suggest two complementary assumptions: (I) A systemic bankruptcy risk stable equilibrium may be feasible, besides another stable equilibrium related to a stability corridor, (II) inefficient financial markets rarely ensure that the price of an asset is equal to its “fundamental long term value."
Keywords: asset prices, liquidity trap, monetary policy, financial stability, business cycles, economic growth, dynamic stochastic general equilibrium models
JEL Classification: E3, E4, E5, E6
Suggested Citation: Suggested Citation