Macro-Modelling, Default and Money
38 Pages Posted: 3 Jun 2016
Date Written: June 1, 2016
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 modelled 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.
Keywords: Default, Money, Financial Intermediation, Liquidity, Modelling
JEL Classification: A10, C70, D50, E11, E50, G10
Suggested Citation: Suggested Citation