Download This PaperMacro-Finance Models with Nonlinear Dynamics
Annual Review of Financial Economics, Forthcoming
The Rodney L. White Center Working Papers Series at the Wharton School
University of Chicago, Becker Friedman Institute for Economics Working Paper
43 Pages Posted: 23 Sep 2019 Last revised: 14 Oct 2022
Date Written: October 13, 2022
Abstract
We review macro-finance models featuring nonlinear dynamics that have recently been developed in the literature, including models with funding liquidity constraints, market liquidity frictions, and bank run frictions, and discuss the empirical evidence and challenges of this class of models. We also construct an illustrative model for readers who are unfamiliar with the literature. Within this framework, we highlight that local linearization approximations omit important nonlinear dynamics and yield biased impulse responses.
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 Wei 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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