Working Paper: CEPR ID: DP14016
Authors: Markus Brunnermeier; Ricardo Reis
Abstract: The financial crises of the last twenty years brought new economic concepts into classroom discussions. This article introduces undergraduate students and teachers to seven of these models: (i) misallocation of capital inflows, (ii) modern and shadow banks, (iii) strategic complementarities and amplification, (iv) debt contracts and the distinction between solvency and liquidity, (v) the diabolic loop, (vi) regional flights to safety, and (vii) unconventional monetary policy. We apply each of them to provide a full account of the euro crisis of 2010-12.
Keywords: Teaching; Financial Crisis; Shadow Banking; Safe Asset; Pecuniary Externalities; Amplification; Systemic Risk; Euro Crisis
JEL Codes: E44; F32; G01
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Capital inflows (F21) | Misallocation of resources (D61) |
| Misallocation of resources (D61) | Lower productivity (O49) |
| Misallocation of resources (D61) | Economic stagnation (N14) |
| Financial integration (F30) | Misallocation of resources (D61) |
| Modern banking practices (G21) | Systemic risk (E44) |
| Banking behavior (G21) | Financial instability (F65) |
| Cutting lending (G21) | Decline in asset prices (G19) |
| Decline in asset prices (G19) | Further declines in lending capacity (G21) |
| Further declines in lending capacity (G21) | Liquidity spiral (E44) |