Macro-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

See all articles by Winston Wei Dou

Winston Wei Dou

The Wharton School, University of Pennsylvania; National Bureau of Economic Research (NBER)

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: 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

Dou, Winston Wei and Fang, Xiang and Lo, Andrew W. and Uhlig, Harald, Macro-Finance Models with Nonlinear Dynamics (October 13, 2022). 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, Available at SSRN: https://ssrn.com/abstract=3457590

Winston Wei Dou (Contact Author)

The Wharton School, University of Pennsylvania ( email )

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HOME PAGE: http://finance-faculty.wharton.upenn.edu/wdou/

National Bureau of Economic Research (NBER) ( email )

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HOME PAGE: http://www.nber.org/people/winston_wei_dou?page=1&perPage=50

Xiang Fang

The University of Hong Kong ( email )

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Hong Kong, Pokfulam HK
China

Andrew W. Lo

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

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E62-618
Cambridge, MA 02142
United States
617-253-0920 (Phone)
781 891-9783 (Fax)

HOME PAGE: http://web.mit.edu/alo/www

Santa Fe Institute

1399 Hyde Park Road
Santa Fe, NM 87501
United States

Harald Uhlig

University of Chicago - Department of Economics ( email )

1101 East 58th Street
Chicago, IL 60637
United States

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