NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Macro, Money and Finance: A Continuous Time Approach

Markus K. Brunnermeier, Yuliy Sannikov

NBER Working Paper No. 22343
Issued in June 2016
NBER Program(s):Asset Pricing, Corporate Finance, International Finance and Macroeconomics, Monetary Economics

This paper puts forward a teaching 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.

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Document Object Identifier (DOI): 10.3386/w22343

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