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date: 20 May 2019

Abstract and Keywords

Mainstream macromodels 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 modeled part of the process, or a “playable game.” Financial systems are not static, nor are they necessarily reverting to an unchanging equilibrium, but they are evolving processes, subject to institutional control mechanisms, which themselves are subject to sociopolitical 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, modeling strategies

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