Working Paper: NBER ID: w26229
Authors: Markus K. Brunnermeier; Ricardo Reis
Abstract: The financial crises of the last twenty years brought new economic concepts into classrooms 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: Euro Crisis; Macroeconomics; Finance; Economic Models
JEL Codes: A2; E4; E5; F3; G1
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 capital (E22) |
| misallocation of capital (E22) | economic conditions leading to the crisis (F65) |
| capital inflows (F21) | investment booms in non-tradable sectors (E22) |
| investment booms in non-tradable sectors (E22) | decline in overall productivity (O49) |
| misallocation of capital (E22) | feedback loop exacerbating economic disparities (F61) |
| feedback loop exacerbating economic disparities (F61) | increased trade deficits and loss of competitiveness (F14) |
| structural features of modern banks (G21) | vulnerability to shocks (D80) |
| vulnerability to shocks (D80) | significant downturns in lending and asset prices (E44) |
| strategic complementarities among banks (E44) | amplification of shocks (E32) |