Affiliation:
1. Department of Economics, 26 Prospect Avenue, Princeton University, Princeton, NJ 08540)
2. Department of Economics, Fisher Hall, Princeton University, Princeton, NJ 08540 (e-mail: )
Abstract
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. (JEL E13, E32, E44, E52, G01, G12, G20)
Publisher
American Economic Association
Subject
Economics and Econometrics
Cited by
1117 articles.
订阅此论文施引文献
订阅此论文施引文献,注册后可以免费订阅5篇论文的施引文献,订阅后可以查看论文全部施引文献