The I Theory of Money

Markus Brunnermeier and Yuliy Sannikov

No 11444, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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; 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: 2016-08
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (52)

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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 (2013)
Working Paper: The I Theory of Money (2012)
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