A macroeconomic model with a financial sector

Markus K. Brunnermeier, Yuliy Sannikov

Research output: Contribution to journalArticlepeer-review

684 Scopus citations


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.

Original languageEnglish (US)
Pages (from-to)379-421
Number of pages43
JournalAmerican Economic Review
Issue number2
StatePublished - Feb 2014

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics


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