NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Macroeconomics with Financial Frictions: A Survey

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

NBER Working Paper No. 18102
Issued in May 2012
NBER Program(s):   AP   CF   EFG   IFM   ME

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.

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Document Object Identifier (DOI): 10.3386/w18102

Published: “Macroeconomics with Financial Frictions: A Survey” (with Thomas Eisenbach and Yuliy Sannikov), in Daron Acemoglu, Manuel Arellano and Eddie Dekel (eds.), Advances in Economics and Econometrics, Tenth World Congress of the Econometric Society, Vol. II: Applied Economics, Cambridge University Press, New York, 2013, pp. 4-94.

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