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Macro-Modelling, Default and Money

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  • Charles Goodhart,Dimitrios Tsomocos & Martin Shubik

Abstract

Mainstream macro-models have assumed away financial frictions, in particular default. The minimum addition in order to introduce financial intermediaries, money and liquidity into such models is the possibility of default. This, in turn, requires that institutions and price formation mechanisms become a modelling part of the process, a ‘playable game’. Financial systems are not static, nor necessarily reverting to an equilibrium, but evolving processes, subject to institutional control mechanisms themselves subject to socio/political development. Process-oriented models of strategic market games can be translated into consistent stochastic models incorporating default and boundary constraints.

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File URL: http://www.lse.ac.uk/fmg/workingPapers/specialPapers/PDF/SP224.pdf
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Bibliographic Info

Paper provided by Financial Markets Group in its series FMG Special Papers with number sp224.

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Date of creation: 2013
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Handle: RePEc:fmg:fmgsps:sp224

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Web page: http://www.lse.ac.uk/fmg/

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