Macro, Money and Finance: A Continuous Time Approach
59 Pages Posted: 20 Jun 2016
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Macro, Money and Finance: A Continuous Time Approach
Date Written: June 2016
Abstract
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.
Keywords: (Inside) Money, Endogenous Risk Dynamics, Financial Frictions, Macroeconomic Modeling, Monetary Economics, Paradox of Prudence, Volatility Paradox
JEL Classification: C63, E32, E41, E44, E51, G01, G11, G20
Suggested Citation: Suggested Citation