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Macro, Money and Finance: A Continuous-Time Approach
Publication Year
2017
Type
Book Chapter
Abstract
This paper puts forward a manual for how to set up and solve a continuous time model that allows 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.
Book Title
Handbook of Macroeconomics
Volume
2B
Pages
1497-1546
Publisher
North-Holland
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