Macro-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

See all articles by Winston Dou

Winston Dou

The Wharton School, University of Pennsylvania

Xiang Fang

The University of Hong Kong

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering; Santa Fe Institute

Harald Uhlig

University of Chicago - Department of Economics

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

Dou, Winston and Fang, Xiang and Lo, Andrew W. and Uhlig, Harald, Macro-Finance Models with Nonlinear Dynamics (July 18, 2020). University of Chicago, Becker Friedman Institute for Economics Working Paper, The Rodney L. White Center Working Papers Series at the Wharton School, Available at SSRN: https://ssrn.com/abstract=3457590

Winston Dou (Contact Author)

The Wharton School, University of Pennsylvania ( email )

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Xiang Fang

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering ( email )

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Santa Fe Institute

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Harald Uhlig

University of Chicago - Department of Economics ( email )

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Chicago, IL 60637
United States

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