Unable to attend to see Markus K. Brunnemeier at the Rutger seminar to discuss one of his current papers in progress "A Marcoeconomic Model with a Financial Sector", I still wanted to provide my comments on the paper.
After reading the paper and the published slides by Brunnemeier and Sannikov, I learned that this most recent financial crisis wasn't the first and will probably not be the last in this sector and have occurred at roughly 10-year intervals becoming less common with the role of the central bank. The paper puts the financial sector at the center of the model as the financial intermediaries are leveraged similar to certain young entrepreneurial firms.
With the financial sector and leverage in the system, the model moves money from less productive agents to more productive agents. This is where Brunnemeier introduces the concept of inside money in addition to the outside money of the system. With the inside money, Brunnemeir comments that an essential ingredient of the model is that any expert who manages capital must absorb at least a fraction of risk that affects the value of the capital.
That is where leave my initial thoughts around the Brunnemeier paper but I still see value in digging into the amplification effect on the overall system. For those who are interested in the slides on this work, here is the link...slides for A Marcoeconomic Model with a Financial Sector.
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