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.