The Failure of Financial Macroeconomics and What to Do About It

28 Pages Posted: 19 Jul 2012

See all articles by Jean-Bernard Chatelain

Jean-Bernard Chatelain

Paris School of Economics, Université Paris 1 Panthéon Sorbonne

Kirsten Ralf

Ecole Supérieure du Commerce Extérieur (ESCE)

Date Written: July 20, 2012

Abstract

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

Chatelain, Jean-Bernard and Ralf, Kirsten, The Failure of Financial Macroeconomics and What to Do About It (July 20, 2012). Available at SSRN: https://ssrn.com/abstract=2111525 or http://dx.doi.org/10.2139/ssrn.2111525

Jean-Bernard Chatelain (Contact Author)

Paris School of Economics, Université Paris 1 Panthéon Sorbonne ( email )

48 Boulevard Jourdan
Paris, 75014 75014
France

HOME PAGE: http://www.parisschoolofeconomics.eu/fr/chatelain-jean-bernard/

Kirsten Ralf

Ecole Supérieure du Commerce Extérieur (ESCE) ( email )

10 Rue Sextius Michel
Paris, 75015
France

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