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Liquidity and Risk in Macroeconomic Models

Objective

The proposal is motivated by the need to incorporate financial realities into macroeconomic models. The objective is to introduce leverage and liquidity in standard dynamic general equilibrium models and analyze their macroeconomic implications. The proposal is divided into two sub-projects and analyzes two different aspects of liquidity. The first deals with leverage and market liquidity in developed financial economies. The second examines the demand for liquid assets by emerging countries and its global implications. In the first sub-project, the proposal breaks new ground in the understanding of the dynamics of risk and in explaining some important features of the recent crisis. The project particularly emphasizes the role of self-fulfilling changes in expectations that can lead to sudden large shifts in risk. This can take the form of a financial panic with a big drop in asset prices. Various extensions will investigate the empirical implications as well as the implications for international capital flows, exchange rates, macroeconomic activity and policy recommendations. In the second sub-project, the objective is to formalize and analyze different degrees of liquidity in international capital flows. The project will innovate in finding ways to model liquidity in dynamic open economy models. This will allow a better understanding of the recent pattern in international capital flows, where less developed countries lend to richer economies. It will also shed light on the evolution of global imbalances before and after the crisis.

Field of science

  • /social sciences/economics and business/economics/macroeconomics

Call for proposal

ERC-2010-AdG_20100407
See other projects for this call

Funding Scheme

ERC-AG - ERC Advanced Grant

Host institution

UNIVERSITE DE LAUSANNE
Address
Quartier Unil-centre Bâtiment Unicentre
1015 Lausanne
Switzerland
Activity type
Higher or Secondary Education Establishments
EU contribution
€ 2 070 570
Principal investigator
Philippe Jean Louis Bacchetta (Prof.)
Administrative Contact
Michele Jaccoud Ramseier (Ms.)

Beneficiaries (1)

UNIVERSITE DE LAUSANNE
Switzerland
EU contribution
€ 2 070 570
Address
Quartier Unil-centre Bâtiment Unicentre
1015 Lausanne
Activity type
Higher or Secondary Education Establishments
Principal investigator
Philippe Jean Louis Bacchetta (Prof.)
Administrative Contact
Michele Jaccoud Ramseier (Ms.)