Download This PaperMacro-Finance Models with Nonlinear Dynamics
University of Chicago, Becker Friedman Institute for Economics Working Paper
The Rodney L. White Center Working Papers Series at the Wharton School
69 Pages Posted: 23 Sep 2019 Last revised: 20 Jul 2020
Date Written: July 18, 2020
Abstract
We provide a review of macro-finance models featuring nonlinear dynamics. We survey the models developed recently in the literature, including models with amplification effects of financial constraints, models with households' leverage constraints, and models with financial networks. We also construct an illustrative model for those readers who are unfamiliar with the literature. Within this framework, we highlight several important limitations of local solution methods compared with global solution methods, including the fact that local-linearization approximations omit important nonlinear dynamics, yielding biased impulse-response analysis.
Keywords: Dynamic Stochastic General Equilibrium (DSGE) Models; Systemic Risk; Endogenous Jump Risk; Financial Constraints; Liquidity
JEL Classification: G12, G29, C51
Suggested Citation: Suggested Citation
Winston Dou (Contact Author)
The Wharton School, University of Pennsylvania ( email )
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Andrew W. Lo
Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering ( email )
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United States
617-253-0920 (Phone)
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