Macroeconomics with Financial Frictions: A Survey
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.
For helpful comments and discussion we would like to thank Dong Beom Choi, Wei Cui, Peter DeMarzo, Delwin Olivan, Ricardo Reis, the participants of the 2010 Econometric Society World Congress in Shanghai and the participants of the 2010 macro-finance reading group at Princeton University. Brunnermeier acknowledges generous support through a Guggenheim Fellowship. The views expressed in the paper are those of the authors and are not necessarily reflective of views at the Federal Reserve Bank of New York, the Federal Reserve System, or the National Bureau of Economic Research.
Markus K. Brunnermeier
Markus K. Brunnermeier: Disclosure of Interest
As a guiding principle I follow the NBER Research Disclosure Policy: http://www.nber.org/researchdisclosurepolicy.html
To date, no single relationship (other than my salary form Princeton University) has accounted for more than 10 percent of my aggregate annual income in that year.
Significant Remunerated Activities:
• Speaking engagements and lectures
o Stifterverband der Deutschen Wirtschaft, 2012
o Ambrosetti – The European House, 2011
o Center for Investor Education, 2011
o Wim Duisenberg School of Finance, 2010
o Handelsbanken, 2010
o Deutsche Bank, 2010
o FEBRABAN, Brazil, 2009
• Central banks
ECB, ESRB, Bank of England, National Bank of Austria, Swiss National Bank, Bank of Japan, Federal Reserve, New York Fed, Bank of Canada, Bank of Chile, Bank of Korea,
• International financial institution
• No expert testimony for law suits or paid consulting work for private cooperation to date.
• Sloan Foundation 2011-12
• Guggenheim Fellowship, 2010-11
• University of Chicago, T.W. Schultz Prize and Lecture, 2010
• INQUIRE Europe, Research Grant
Visiting Scholar and Other:
• Milton Friedman Institute, visiting scholar 2011
• American Economic Review, Journal of Finance, Associated Editorship
Significant Non-Compensated Activities:
• American Finance Association: Director
• Financial Advisory Roundtable and Monetary Policy Panel, Federal Reserve Bank of New York, 2006 – present
• INET Advisory Board Member, 2009 – present
“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.