Macro-modelling, default and money

C. A. E. Goodhart, Nikolas Romanidis, Dimitri Tsomocos and Martin Shubik

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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 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 (search for similar items in EconPapers)
JEL-codes: A10 C70 D50 E11 E50 G10 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2017-06-01
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http://eprints.lse.ac.uk/118968/ Open access version. (application/pdf)

Related works:
Working Paper: Macro-Modelling, Default and Money (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:118968

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