The failure of financial macroeconomics and what to do about it

Chatelain, Jean-Bernard and Ralf, Kirsten (2012): The failure of financial macroeconomics and what to do about it.

Abstract

The bargaining power of international banks is currently still very high as compared to what it was at the time of the Bretton Woods conference. As a consequence, systemic financial crises are likely to remain recurrent phenomena with large effects on macroeconomic aggregates. Mainstream macroeconomic models dealing with financial frictions failed to explain at least eight features of the ongoing crisis. We therefore suggest two complementary assumptions: (I) A systemic bankruptcy risk stable equilibrium may be feasible, besides another stable equilibrium related to a stability corridor, (II) inefficient financial markets rarely ensure that the price of an asset is equal to its “fundamental long term value”. Both assumptions are compatible with a structural research programme taking into account the Lucas' critique (1976) but may start a creative destruction process of the Lucas' view of business cycles theory.

• Item Type: MPRA Paper
• Language: English
• Keywords: asset prices; liquidity trap; monetary policy; financial stability; business cycles; liquidity trap; dynamic stochastic general equilibrium models
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles

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