American Economic Review: Vol. 104 No. 2 (February 2014)


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A Macroeconomic Model with a Financial Sector

Article Citation

Brunnermeier, Markus K., and Yuliy Sannikov. 2014. "A Macroeconomic Model with a Financial Sector." American Economic Review, 104(2): 379-421.

DOI: 10.1257/aer.104.2.379


This article studies the full equilibrium dynamics of an economy with financial frictions. Due to highly nonlinear amplification effects, the economy is prone to instability and occasionally enters volatile crisis episodes. Endogenous risk, driven by asset illiquidity, persists in crisis even for very low levels of exogenous risk. This phenomenon, which we call the volatility paradox, resolves the Kocherlakota (2000) critique. Endogenous leverage determines the distance to crisis. Securitization and derivatives contracts that improve risk sharing may lead to higher leverage and more frequent crises.

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Online Appendix (349.26 KB) | Download Data Set (669.74 KB) | Author Disclosure Statement(s) (657.00 KB)


Brunnermeier, Markus K. (Princeton U)
Sannikov, Yuliy (Princeton U)

JEL Classifications

E13: General Aggregative Models: Neoclassical
E32: Business Fluctuations; Cycles
E44: Financial Markets and the Macroeconomy
E52: Monetary Policy
G01: Financial Crises
G12: Asset Pricing; Trading Volume; Bond Interest Rates
G20: Financial Institutions and Services: General

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