- Title
- The I Theory of Money
- Author(s)
- Markus K. Brunnermeier Markus Brunnermeier (Princeton University)
- Yuliy Sannikov Yuliy Sannikov (Princeton University)
- 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.
- Creation Date
- 2019-08
- Section URL ID
- Paper Number
- 2016-2
- URL
- https://scholar.princeton.edu/sites/default/files/markus/files/10r_theory.pdf
- File Function
- Jel
- E32, E41, E44, E51, E52, E58, G01, G11, G21
- Keyword(s)
- Monetary Economics, (Inside) Money, Endogenous Risk Dynamics, Volatility Paradox, Paradox of Prudence, Financial Frictions
- Suppress
- false
- Series
- 13