Posted

June 17, 2012 10:46:27 PM

Date

2012-05

Author

Markus K. Brunnermeier, Thomas M. Eisenbach and Yuliy Sannikov

Affiliation

National Bureau of Economic Research

Title

Macroeconomics with Financial Frictions: A Survey

Summary /
Abstract

This article surveys the macroeconomic implications of financial frictions. Financial frictions lead to persistence and when combined with illiquidity to non-linear amplification effects. Risk is endogenous and liquidity spirals cause financial instability. Increasing margins further restrict leverage and exacerbate downturns. A demand for liquid assets and a role for money emerges. The market outcome is generically not even constrained efficient and the issuance of government debt can lead to a Pareto improvement. While financial institutions can mitigate frictions, they introduce additional fragility and through their erratic money creation harm price stability.

Keywords

Macroeconomics, financial frictions

URL

http://d.repec.org/n?u=RePEc:nbr:nberwo:18102&r=mon

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