|The I Theory of Money||1.31 MB|
A theory of money needs a proper place for financial intermediaries. Intermediaries create money by taking deposits from savers and investing them in productive projects. The money multiplier depends on the size of intermediary balance sheets, and their ability to take risks. In downturns, as lending contracts and the money multiplier shrinks, the value of money rises. This leads to a Fisher deflation that hurts borrowers and amplifies shocks. An accommodative monetary policy in downturns, focused on the assets held by constrained agents, can mitigate these destabilizing adverse feedback effects. We devote particular attention to interest rate cuts, and study the potential for such policies to create moral hazard.
China's economic model involves active government intervention in financial markets. It relaxes/tightens market regulations and even directs asset trading with the objective to maintain market stability. We develop a theoretical framework that anchors government intervention on a mission to prevent market breakdown and the explosion of volatility caused by the reluctance of short-term investors to trade against noise traders when the risk of trading against them is sufficiently large. In the presence of realistic information frictions about unobservable asset fundamentals, our framework shows that the government can alter market dynamics by making noise in its intervention program an additional factor driving asset prices, and can divert investor attention toward acquiring information about this noise rather than fundamentals. Through this latter channel, the widely-adopted objective of government intervention to reduce asset price volatility may exacerbate, rather than improve, the information efficiency of asset prices.
China’s gradualistic approach allowed the government to learn how the economy reacts to small policy changes, and to adjust its reforms before implementing them in full. With fully developed financial markets, however, private actors’ may front-run future policy changes making it impossible for the implement policies gradually. With financial markets the government faces a time-inconsistency problem. The government would like to commit to a gradualistic approach, but after it observes the economy’s quick reaction, it has no incentive to implement its policies in small steps.
The Economist Books of the Year 2016
Bloomberg Best Books of 2016
Financial Times' Best Books of 2016: Economics List
2017 Axiom Business Book Award (Gold in International/Globalization)
English: Reuters, The Economist, Foreign Policy in Focus, Politico Europe, Australian Financial Review, Pro-Market, The New York Review of Books, EconomicsOne, The New York Times, The Economist, Current History, Financial Times, New Yorker, Harvard Business Review, Bloomberg, Yahoo Finance,
Italian: Italiani, Il Foglio,
Portugese: Dinheiro Vivo, Expresso,
Polish: Forsal, Obserwatorfinansow,
Arabic: Elaph, Arab News,
Finnish: Talouselämä, Suomen Kuvalehti, Liikanen Review, Helsingen Sanomat, TV,
German: FAS, SZ interview-duel with Joe Stiglitz, NZZ, Berliner Zeitung, Frankfurter Rundschau, FAZ, Badische Zeitung, Wirtschaftswoche, SZ, ...
Boston, Chicago, Amsterdam, Bonn, Geneva, St. Gallen, Zurich, Freiburg, ESM, French Embassy in Berlin with W. Schäuble, LSE, CER London, Science Po, Bruegel, European Parliament (1) (2), Helsinki, Copenhagen, Mannheim, Princeton, Panel with Joe Stiglitz in NYC, France Stratégie, Cambridge, BIS.
The euro crisis was fueled by the diabolic loop between sovereign risk and bank risk, coupled with cross-border flight-to-safety capital flows. European Safe Bonds (ESBies), a union-wide safe asset without joint liability, would help to resolve these problems. We make three contributions. First, numerical simulations show that ESBies would be at least as safe as German bunds and approximately double the supply of euro safe assets when protected by a 30%-thick junior tranche. Second, a model shows how, when and why the two features of ESBies---diversification and seniority---can weaken the diabolic loop and its diffusion across countries. Third, we propose a step-by-step guide on how to create ESBies, starting with limited issuance by public or private-sector entities.
Markus K. Brunnermeier is the Edwards S. Sanford Professor at Princeton University. He is a faculty member of the Department of Economics and director of Princeton's Bendheim Center for Finance. He is the founding and former director of Princeton’s Julis Rabinowitz Center for Public Policy and Finance and affiliated with the International Economics Section. He is also a research associate at NBER, CEPR, and CESifo. He is a member of several advisory groups, including to the IMF, the Federal Reserve of New York, the European Systemic Risk Board, the Bundesbank and the U.S. Congressional Budget Office. Brunnermeier was awarded his Ph.D. by the London School of Economics (LSE). He is currently visiting the Bank of International Settlement (BIS) as Alexandre Lamfalussy Fellow.
His research focuses on international financial markets and the macroeconomy with special emphasis on bubbles, liquidity, financial and monetary price stability. To explore these topics, his models incorporate frictions as well as behavioral elements. He is a Sloan Research Fellow, Fellow of the Econometric Society and the recipient of the Bernácer Prize granted for outstanding contributions in the fields of macroeconomics and finance. He received a Guggenheim Fellowship for studying the impact of financial frictions on the macroeconomy. He has been awarded several best paper prizes and served on the editorial boards of several leading economics and finance journals. He has tried to establish the concepts liquidity spirals, CoVaR as co-risk measure, the Volatility Paradox, Paradox of Prudence, ESBies, financial dominance and the redistributive monetary policy.
Fun Factoid: Meanings of my forenames
Markus Latin: Dedicated to Mars, Roman god of war
Sukram (reverse spelling) Hindi: The one in whom peace pervades
Konrad (middle name) Germanic: Wise counselor