IDEAS home Printed from https://ideas.repec.org/p/hal/cesptp/halshs-00706777.html
   My bibliography  Save this paper

The Failure of Financial Macroeconomics and What to Do About it

Author

Listed:
  • Jean-Bernard Chatelain

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

  • Kirsten Ralf

    (Ecole Supérieure du Commerce Extérieur - ESCE - International business school)

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 stylized facts 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.

Suggested Citation

  • Jean-Bernard Chatelain & Kirsten Ralf, 2012. "The Failure of Financial Macroeconomics and What to Do About it," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00706777, HAL.
    • Handle: RePEc:hal:cesptp:halshs-00706777
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00706777
    as

    Download full text from publisher

    File URL: https://shs.hal.science/halshs-00706777/document
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. George W. Stadler, 1994. "Real Business Cycles," Journal of Economic Literature, American Economic Association, vol. 32(4), pages 1750-1783, December.
    2. Amable, Bruno & Chatelain, Jean-Bernard & Ralf, Kirsten, 2010. "Patents as collateral," Journal of Economic Dynamics and Control, Elsevier, vol. 34(6), pages 1092-1104, June.
    3. Ben S. Bernanke & Mark Gertler, 2001. "Should Central Banks Respond to Movements in Asset Prices?," American Economic Review, American Economic Association, vol. 91(2), pages 253-257, May.
    4. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
    5. Gilchrist, Simon & Leahy, John V., 2002. "Monetary policy and asset prices," Journal of Monetary Economics, Elsevier, vol. 49(1), pages 75-97, January.
    6. Carmen M. Reinhart & Kenneth S. Rogoff, 2014. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 215-268, November.
    7. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters, in: This Time Is Different: Eight Centuries of Financial Folly, Princeton University Press.
    8. Nobuhiro Kiyotaki & Gauti Eggertsson & Andrea Ferrero & Marco Del Negro, 2010. "The Great Escape? A Quantitative Evaluation of the Fed’s Non-Standard Policies," 2010 Meeting Papers 113, Society for Economic Dynamics.
    9. Marcus Miller & Joseph Stiglitz, 2010. "Leverage and Asset Bubbles: Averting Armageddon with Chapter 11?," Economic Journal, Royal Economic Society, vol. 120(544), pages 500-518, May.
    10. Kiminori Matsuyama, 2007. "Credit Traps and Credit Cycles," American Economic Review, American Economic Association, vol. 97(1), pages 503-516, March.
    11. Jean-Bernard Chatelain & Bruno Tinel & Karim Azizi & Nicolas Canry, 2012. "Are the No-Ponzi Game and the Transversality Conditions Relevant for Public Debt? A Keynesian Appraisal," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00686788, HAL.
    12. Ben S. Bernanke & Mark Gertler, 1999. "Monetary policy and asset price volatility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 77-128.
    13. Blanchard Olivier & Weil Philippe, 2001. "Dynamic Efficiency, the Riskless Rate, and Debt Ponzi Games under Uncertainty," The B.E. Journal of Macroeconomics, De Gruyter, vol. 1(2), pages 1-23, November.
    14. Matteo Iacoviello, 2005. "House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle," American Economic Review, American Economic Association, vol. 95(3), pages 739-764, June.
    15. Chatelain, Jean-Bernard & Ralf, Kirsten, 2014. "Spurious regressions and near-multicollinearity, with an application to aid, policies and growth," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 39(A), pages 85-96.
    16. Kamihigashi, Takashi, 2005. "Necessity of the transversality condition for stochastic models with bounded or CRRA utility," Journal of Economic Dynamics and Control, Elsevier, vol. 29(8), pages 1313-1329, August.
    17. HALKIN, Hubert, 1974. "Necessary conditions for optimal control problems with infinite horizons," LIDAM Reprints CORE 193, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    18. Driskill, Robert, 2006. "Multiple equilibria in dynamic rational expectations models: A critical review," European Economic Review, Elsevier, vol. 50(1), pages 171-210, January.
    19. Amable, Bruno & Chatelain, Jean-Bernard & De Bandt, Olivier, 2002. "Optimal capacity in the banking sector and economic growth," Journal of Banking & Finance, Elsevier, vol. 26(2-3), pages 491-517, March.
    20. Ricardo J. Caballero & Takeo Hoshi & Anil K. Kashyap, 2008. "Zombie Lending and Depressed Restructuring in Japan," American Economic Review, American Economic Association, vol. 98(5), pages 1943-1977, December.
    21. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-248, April.
    22. repec:hal:wpspec:info:hdl:2441/8607 is not listed on IDEAS
    23. repec:fth:jonhop:390 is not listed on IDEAS
    24. Shleifer, Andrei & Vishny, Robert W., 2010. "Unstable banking," Journal of Financial Economics, Elsevier, vol. 97(3), pages 306-318, September.
    25. Robert J. Shiller, 2003. "From Efficient Markets Theory to Behavioral Finance," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 83-104, Winter.
    26. Paul Grauwe, 2010. "The scientific foundation of dynamic stochastic general equilibrium (DSGE) models," Public Choice, Springer, vol. 144(3), pages 413-443, September.
    27. Jose A. Scheinkman & Wei Xiong, 2003. "Overconfidence and Speculative Bubbles," Journal of Political Economy, University of Chicago Press, vol. 111(6), pages 1183-1219, December.
    28. Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 323-338, November.
    29. Bryant, John, 1981. "Bank Collapse and Depression," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 13(4), pages 454-464, November.
    30. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, September.
    31. Burmeister, Edwin, et al, 1973. "The "Saddlepoint Property" and the Structure of Dynamic Heterogeneous Capital Good Models," Econometrica, Econometric Society, vol. 41(1), pages 79-95, January.
    32. Azizi, Karim & Canry, Nicolas & Chatelain, Jean-Bernard & Tinel, Bruno, 2012. "Are no-Ponzi game and transversality conditions relevant for public debt?," European Journal of Economic and Social Systems, Lavoisier, vol. 25(1-2), pages 45-58.
    33. Philippe Weil & Olivier Blanchard, 2001. "Debt Ponzi games and dynamic efficiency under uncertainty," ULB Institutional Repository 2013/13442, ULB -- Universite Libre de Bruxelles.
    34. Philip Lowe & Claudio Borio, 2002. "Asset prices, financial and monetary stability: exploring the nexus," BIS Working Papers 114, Bank for International Settlements.
    35. Carroll Christopher Dixon, 2001. "Death to the Log-Linearized Consumption Euler Equation! (And Very Poor Health to the Second-Order Approximation)," The B.E. Journal of Macroeconomics, De Gruyter, vol. 1(1), pages 1-38, April.
    36. Javier Bianchi & Enrique G. Mendoza, 2010. "Overborrowing, financial crises and ‘macro-prudential’ taxes," Proceedings, Federal Reserve Bank of San Francisco, issue Oct.
    37. John Bryant, 1983. "A Simple Rational Expectations Keynes-type Model," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 98(3), pages 525-528.
    38. Vercelli,Allessandro, 1991. "Methodological Foundations of Macroeconomics," Cambridge Books, Cambridge University Press, number 9780521392945, September.
    39. Halkin, Hubert, 1974. "Necessary Conditions for Optimal Control Problems with Infinite Horizons," Econometrica, Econometric Society, vol. 42(2), pages 267-272, March.
    40. Rajan, Raghuram G. & Zingales, Luigi, 2003. "The great reversals: the politics of financial development in the twentieth century," Journal of Financial Economics, Elsevier, vol. 69(1), pages 5-50, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Christophe Blot & Marion Cochard & Jérôme Creel & Bruno Ducoudré & Danielle Schweisguth & Xavier Timbeau, 2014. "Is There an Alternative Strategy for Reducing Public Debt by 2032?," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 61(1), pages 39-57, Februar.
    2. Azizi, Karim & Canry, Nicolas & Chatelain, Jean-Bernard & Tinel, Bruno, 2013. "Government Solvency, Austerity and Fiscal Consolidation in the OECD: A Keynesian Appraisal of Transversality and No Ponzi Game Conditions," MPRA Paper 46519, University Library of Munich, Germany.
    3. Jean-Bernard Chatelain & Bruno Tinel & Karim Azizi & Nicolas Canry, 2012. "Are the No-Ponzi Game and the Transversality Conditions Relevant for Public Debt? A Keynesian Appraisal," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00686788, HAL.
    4. Jean-Bernard Chatelain, 2013. "Goodhart, Charles A.E. and Tsomocos, Dimitros P.: The challenge of financial stability: a new model and its applications," Journal of Economics, Springer, vol. 109(2), pages 201-205, June.
    5. Christophe Blot & Marion Cochard & Jérôme Creel & Bruno Ducoudré & Danielle Schweisguth & Xavier Timbeau, 2014. "Fiscal Consolidation, Public Debt and Output Dynamics in the Euro Area: lessons from a simple model with time-varying fiscal multipliers," Revue d'économie politique, Dalloz, vol. 124(6), pages 953-989.
    6. repec:spo:wpmain:info:hdl:2441/5lup9cglk297n859jlfvqeji2r is not listed on IDEAS
    7. repec:hal:spmain:info:hdl:2441/6fiderh62j8n1au8s8acc66css is not listed on IDEAS
    8. Jean-Bernard, Chatelain, 2013. "Book review: “The Challenge of Financial Stability: A New Model and its Applications” by Goodhart C.A.E. and Tsomocos D.P," MPRA Paper 45678, University Library of Munich, Germany.
    9. Francesco Sergi, 2015. "L'histoire (faussement) naïve des modèles DSGE," Documents de travail du Centre d'Economie de la Sorbonne 15066, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    10. Christophe Blot & Marion Cochard & Jérôme Creel & Bruno Ducoudré & Danielle Schweisguth & Xavier Timbeau, 2014. "Is There an Alternative Strategy for Reducing Public Debt by 2032?," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 61(1), pages 39-57.
    11. Teresa Garcia & Daniel Borrego, 2017. "Markowitz Efficient Frontier And Capital Market Line – Evidence From The Portuguese Stock Market," Portuguese Journal of Management Studies, ISEG, Universidade de Lisboa, vol. 22(1), pages 3-23.
    12. repec:hal:spmain:info:hdl:2441/5lup9cglk297n859jlfvqeji2r is not listed on IDEAS
    13. Francesco Sergi, 2015. "L'histoire (faussement) naïve des modèles DSGE," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-01222798, HAL.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jean- Bernard Chatelain, 2012. "Try again, macroeconomists," Chapters, in: Robert M. Solow & Jean-Philippe Touffut (ed.), What’s Right with Macroeconomics?, chapter 4, pages 90-109, Edward Elgar Publishing.
    2. Azizi, Karim & Canry, Nicolas & Chatelain, Jean-Bernard & Tinel, Bruno, 2013. "Government Solvency, Austerity and Fiscal Consolidation in the OECD: A Keynesian Appraisal of Transversality and No Ponzi Game Conditions," EconStor Preprints 72550, ZBW - Leibniz Information Centre for Economics.
    3. Jean-Bernard Chatelain & Bruno Tinel & Karim Azizi & Nicolas Canry, 2012. "Are the No-Ponzi Game and the Transversality Conditions Relevant for Public Debt? A Keynesian Appraisal," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00686788, HAL.
    4. Claudio Borio, 2011. "Rediscovering the Macroeconomic Roots of Financial Stability Policy: Journey, Challenges, and a Way Forward," Annual Review of Financial Economics, Annual Reviews, vol. 3(1), pages 87-117, December.
    5. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95.
    6. Taipalus, Katja, 2012. "Detecting asset price bubbles with time-series methods," Scientific Monographs, Bank of Finland, number 2012_047.
    7. Tomura, Hajime, 2013. "Heterogeneous beliefs and housing-market boom-bust cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 37(4), pages 735-755.
    8. Ioanna Kokores, 2015. "Lean-Against-the-Wind Monetary Policy: The Post-Crisis Shift in the Literature," SPOUDAI Journal of Economics and Business, SPOUDAI Journal of Economics and Business, University of Piraeus, vol. 65(3-4), pages 66-99, july-Dece.
    9. Mishkin, Frederic S., 2017. "Rethinking monetary policy after the crisis," Journal of International Money and Finance, Elsevier, vol. 73(PB), pages 252-274.
    10. repec:zbw:bofism:2012_047 is not listed on IDEAS
    11. Taipalus, Katja, 2012. "Detecting asset price bubbles with time-series methods," Bank of Finland Scientific Monographs, Bank of Finland, volume 0, number sm2012_047, July.
    12. Gambacorta, Leonardo & Signoretti, Federico M., 2014. "Should monetary policy lean against the wind?," Journal of Economic Dynamics and Control, Elsevier, vol. 43(C), pages 146-174.
    13. Kontonikas, Alexandros & Ioannidis, Christos, 2005. "Should monetary policy respond to asset price misalignments?," Economic Modelling, Elsevier, vol. 22(6), pages 1105-1121, December.
    14. Moritz Schularick & Alan M. Taylor, 2012. "Credit Booms Gone Bust: Monetary Policy, Leverage Cycles, and Financial Crises, 1870-2008," American Economic Review, American Economic Association, vol. 102(2), pages 1029-1061, April.
    15. Homburg, Stefan, 2017. "A Study in Monetary Macroeconomics," OUP Catalogue, Oxford University Press, number 9780198807537.
    16. Akaki Tsomaia, 2021. "Asset bubbles, financial sector, and current challenges to regulatory framework," International Economics and Economic Policy, Springer, vol. 18(4), pages 901-925, October.
    17. Faia, Ester & Monacelli, Tommaso, 2007. "Optimal interest rate rules, asset prices, and credit frictions," Journal of Economic Dynamics and Control, Elsevier, vol. 31(10), pages 3228-3254, October.
    18. Stefan Eichler & Tom Lähner, 2014. "Regional House Price Dynamics And Voting Behavior In The Fomc," Economic Inquiry, Western Economic Association International, vol. 52(2), pages 625-645, April.
    19. Frederic S. Mishkin, 2011. "Monetary Policy Strategy: Lessons from the Crisis," NBER Working Papers 16755, National Bureau of Economic Research, Inc.
    20. Stephan Fahr & Roberto Motto & Massimo Rostagno & Frank Smets & Oreste Tristani, 2013. "A monetary policy strategy in good and bad times: lessons from the recent past [Inflation persistence and price-setting behavior in the euro area – a summary of the IPN evidence]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 28(74), pages 243-288.
    21. Vorada Limjaroenrat, 2017. "Distributional Effects of Monetary Policy on Housing Bubbles: Some Evidence," PIER Discussion Papers 74, Puey Ungphakorn Institute for Economic Research.

    More about this item

    Keywords

    general equilibrium models; Asset prices; liquidity trap; monetary policy; financial stability; business cycles; economic growth; dynamic stochastic; Prix d'actifs; trappe à liquidité; politique monétaire; stabilité financière; cycles économiques; croissance économique; modèles d'équilibre général dynamique stochastique;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hal:cesptp:halshs-00706777. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: CCSD (email available below). General contact details of provider: https://hal.archives-ouvertes.fr/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.