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Macro, Money and Finance: A Continuous Time Approach

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  • Markus K. Brunnermeier
  • Yuliy Sannikov

Abstract

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.

Suggested Citation

  • Markus K. Brunnermeier & Yuliy Sannikov, 2016. "Macro, Money and Finance: A Continuous Time Approach," NBER Working Papers 22343, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:22343
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    Cited by:

    1. William Chen & Gregory Phelan, 2023. "Should Monetary Policy Target Financial Stability," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 49, pages 181-200, July.
    2. Sergio Rebelo & Neng Wang & Jinqiang Yang, 2018. "Rare Disasters, Financial Development, and Sovereign Debt," NBER Working Papers 25031, National Bureau of Economic Research, Inc.
    3. Victor Olkhov, 2017. "Econophysics of Macro-Finance: Local Multi-fluid Models and Surface-like Waves of Financial Variables," Papers 1706.01748, arXiv.org.
    4. Angeletos, G.-M. & Lian, C., 2016. "Incomplete Information in Macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 1065-1240, Elsevier.
    5. Patrick Bolton & Ye Li & Neng Wang & Jinqiang Yang, 2020. "Dynamic Banking and the Value of Deposits," NBER Working Papers 28298, National Bureau of Economic Research, Inc.
    6. Victor Olkhov, 2018. "How Macro Transactions Describe the Evolution and Fluctuation of Financial Variables," IJFS, MDPI, vol. 6(2), pages 1-19, March.
    7. Niko Jaakkola & Florian Wagener & Florian O.O. Wagener, 2023. "Differential Games of Public Investment: Markovian Best Responses in the General Case," CESifo Working Paper Series 10585, CESifo.
    8. Bigio, Saki & Schneider, Andrés, 2017. "Liquidity shocks, business cycles and asset prices," European Economic Review, Elsevier, vol. 97(C), pages 108-130.
    9. George-Marios Angeletos & Chen Lian, 2016. "Incomplete Information in Macroeconomics: Accommodating Frictions in Coordination," NBER Working Papers 22297, National Bureau of Economic Research, Inc.
    10. Mao, Jie & Shen, Guanxiong & Yan, Jingzhou, 2023. "A continuous-time macro-finance model with Knightian uncertainty," Pacific-Basin Finance Journal, Elsevier, vol. 77(C).
    11. Phelan, Thomas & Eslami, Keyvan, 2022. "Applications of Markov chain approximation methods to optimal control problems in economics," Journal of Economic Dynamics and Control, Elsevier, vol. 143(C).
    12. Ricardo Reis, 2019. "Central Banks Going Long," Central Banking, Analysis, and Economic Policies Book Series, in: Álvaro Aguirre & Markus Brunnermeier & Diego Saravia (ed.),Monetary Policy and Financial Stability: Transmission Mechanisms and Policy Implications, edition 1, volume 26, chapter 3, pages 043-081, Central Bank of Chile.
    13. Jerónimo, J. & Azevedo, Assis & Neves, P.C. & Thompson, M., 2023. "Interactions between financial constraints and economic growth," The North American Journal of Economics and Finance, Elsevier, vol. 67(C).
    14. Hori, Takeo & Im, Ryonghun, 2023. "Asset bubbles, entrepreneurial risks, and economic growth," Journal of Economic Theory, Elsevier, vol. 210(C).
    15. Helena Chuliá & Ignacio Garrón & Jorge M. Uribe, 2021. ""Vulnerable Funding in the Global Economy"," IREA Working Papers 202106, University of Barcelona, Research Institute of Applied Economics, revised Mar 2021.
    16. Victor Olkhov, 2017. "Non-Local Macroeconomic Transactions and Credits-Loans Surface-Like Waves," Papers 1706.07758, arXiv.org.
    17. William Chen & Gregory Phelan, 2023. "Should Monetary Policy Target Financial Stability," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 49, pages 181-200, July.

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    More about this item

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G01 - Financial Economics - - General - - - Financial Crises
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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