DP11329 Macro, Money and Finance: A Continuous Time Approach
|Author(s):||Markus K Brunnermeier, Yuliy Sannikov|
|Publication Date:||June 2016|
|Keyword(s):||(Inside) Money, Endogenous Risk Dynamics, Financial Frictions, Macroeconomic Modeling, Monetary Economics, Paradox of Prudence, Volatility Paradox|
|JEL(s):||C63, E32, E41, E44, E51, G01, G11, G20|
|Programme Areas:||Financial Economics, International Macroeconomics and Finance, Monetary Economics and Fluctuations|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=11329|
This paper puts forward a manual for how to set up and solve a continuous time model that allows one to analyze endogenous (1) level and risk dynamics. The latter includes (2) tail risk and crisis probability as well as (3) the Volatility Paradox. Concepts such as (4) illiquidity and liquidity mismatch, (5) endogenous leverage, (6) the Paradox of Prudence, (7) undercapitalized sectors (8) time-varying risk premia, and (9) the external funding premium are part of the analysis. Financial frictions also give rise to an endogenous (10) value of money.