The I Theory of Money

Markus Brunnermeier and Yuliy Sannikov
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Yuliy Sannikov: Princeton University

Working Papers from Princeton University. Economics Department.

Abstract: A theory of money needs a proper place for financial intermediaries. Intermediaries diversify risks and create inside money. In downturns, micro-prudent intermediaries shrink their lending activity, fire-sell assets and supply less inside money, exactly when money demand rises. The resulting Fisher disinflation hurts intermediaries and other borrowers. Shocks are amplified, volatility spikes and risk premia rise. Monetary policy is redistributive. Accommodative monetary policy that boosts assets held by balance sheet-impaired sectors, recapitalizes them and mitigates the adverse liquidity and disinflationary spirals. Since monetary policy cannot provide insurance and control risk-taking separately, adding macroprudential policy that limits leverage attains higher welfare.

Keywords: Monetary Economics; (Inside) Money; Endogenous Risk Dynamics; Volatility Paradox; Paradox of Prudence; Financial Frictions (search for similar items in EconPapers)
JEL-codes: E32 E41 E44 E51 E52 E58 G01 G11 G21 (search for similar items in EconPapers)
Date: 2019-08
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https://scholar.princeton.edu/sites/default/files/markus/files/10r_theory.pdf

Related works:
Working Paper: The I Theory of Money (2016)
Working Paper: The I Theory of Money (2016)
Working Paper: The I Theory of Money (2016)
Working Paper: The I-Theory of Money (2013)
Working Paper: The I Theory of Money (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:pri:econom:2016-2

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