The I-Theory of Money

Yuliy Sannikov and Markus Brunnermeier
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Yuliy Sannikov: Princeton University

No 620, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: This paper provides a theory of money, whose value depends on the functioning of the intermediary sector, and a unified framework for analyzing the interaction between price and financial stability. Households that happen to be productive in this period finance their capital purchases with credit from intermediaries. Less productive household save by holding deposits with intermediaries (inside money) or outside money. Intermediation involves risk-taking, and intermediaries' ability to lend is compromised when they suffer losses. After an adverse productivity shock, credit and inside money shrink, and the value of (outside) money increases, causing deflation that hurts borrowers. An accommodating monetary policy in downturns can mitigate these destabilizing adverse feedback eects. Lowering short-term interest rates increases the value of long-term bonds, recapitalizes the intermediaries by redistributes wealth. While this policy helps the economy ex-post, ex-ante it can lead to excessive risk-taking by the intermediary sector.

Date: 2013
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
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Citations: View citations in EconPapers (15)

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Related works:
Working Paper: The I Theory of Money (2019)
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 (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed013:620

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