The I Theory of Money

67 Pages Posted: 22 Aug 2016

See all articles by Markus K. Brunnermeier

Markus K. Brunnermeier

Princeton University - Department of Economics

Yuliy Sannikov

Stanford GSB

Multiple version iconThere are 2 versions of this paper

Date Written: August 2016

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: (Inside) Money, Endogenous Risk Dynamics, Financial Frictions., Monetary Economics, Paradox of Prudence

JEL Classification: E32, E41, E44, E51, E52, E58, G01, G11, G21

Suggested Citation

Brunnermeier, Markus Konrad and Sannikov, Yuliy, The I Theory of Money (August 2016). CEPR Discussion Paper No. DP11444, Available at SSRN: https://ssrn.com/abstract=2827562

Markus Konrad Brunnermeier (Contact Author)

Princeton University - Department of Economics ( email )

Bendheim Center for Finance
Princeton, NJ
United States
609-258-4050 (Phone)
609-258-0771 (Fax)

HOME PAGE: http://www.princeton.edu/¡­markus

Yuliy Sannikov

Stanford GSB ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

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