The I Theory of Money
67 Pages Posted: 22 Aug 2016
There are 2 versions of this paper
The I Theory of Money
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: Suggested Citation