A simple macroeconomic model with extreme financial frictions

The Dynamic Properties of a Nonlinear Economic Model with Extreme Financial Frictions

“…Brunnermeier and Sannikov's model can only be solved in a numerical way and some of their predictions go somewhat against empirical evidence. To make up for these drawbacks, Klimenko et al [10] have developed a dynamic macroeconomic model in a simple setting to analyze the significance of the endogenous risk. With the setting, they get dynamic equations and work out a quasi-closed form solution.…”

“…They explicitly track down the roots of some important features like poverty trap, which is explained as the paradox of volatility and persistence of exogenous shocks. The implication of endogenous risk for welfare analysis is illustrated [10], while, in [10], they suppose an easy case in which the rental rate has a linear effect on its process. The assumption does not seem to be very practical.…”

“…Following the works in [10], we adopt two kinds of agents: risk-neutral landlords and risk-averse farmers. Landlords, 2 Mathematical Problems in Engineering which are less productive, own the land.…”

“…One of the remarkable settings in [10] is that the authors suppose there exists a rental market in which the rental rate follows a Markov stationary process, which takes the form similar to Geometric Brownian Motion (GBM). With the equilibrium conditions, Klimenko et al [10] obtain the closed form solutions and consequently keep on with further analysis.…”

“…With the equilibrium conditions, Klimenko et al [10] obtain the closed form solutions and consequently keep on with further analysis. The reason why they choose the form like GBM is that the rental rate is larger than 0 in the real world.…”