Financial Intermediary, Crises and Macroeconomic Policy

Princeton University, Princeton NJ

Investigators

Abstract

This project funds research into the interaction between liquidity, asset prices, and aggregate activity with a focus on financial intermediation, crises, and macroeconomic policies. The goal is to develop new modeling frameworks that will improve our understanding of the interactions between financial intermediation, balance sheet adjustment, and aggregate production. These macroeconomic frameworks incorporate the possibility of actual bank runs and anticipation of bank runs. As a result, the research can improve our understanding of financial crisis events. One part of the research program will analyze balance sheet adjustment including both financial and real assets, and provides new insights into how a financial crisis may lead to slower aggregate economic growth. The results of the research will give policymakers better insight into how to best promote financial and macroeconomic stability. The project has several parts. The first is joint with Kosuke Aoki and Gianluca Benigno, and it investigates a small open economy with financial intermediaries which fund capital investment by borrowing from home and foreign agents, exploring the role of monetary and financial policies. The second project is joint work with Mark Gertler; it builds a macroeconomic model of banking which incorporates a financial accelerator and rollover risk to examine financial crises. The third project with John Moore studies systemic risk when many financial intermediaries lend and borrow from each other.