Macro-Finance Models with Nonlinear Dynamics

Joint with Andrew W. Lo, Xiang Fang, Harald Uhlig

Annual Review of Financial Economics (2023) Vol. 15, No. 1, 407-432

We review macro-finance models featuring nonlinear dynamics that have recently been introduced, including models with liquidity constraints and nonlinear dynamics, models with households' leverage constraints, and models with financial networks. We also construct an illustrative model for readers who are unfamiliar with this literature. Within this framework, we highlight that standard local-linearization approximations omit important nonlinear dynamics, yielding biased impulse response functions.