Brunnermeier, Markus K., Sebastian Merkel, and Yuliy Sannikov. “
The Fiscal Theory of the Price Level with a Bubble”. Submitted. Print.
AbstractThis paper incorporates a bubble term in the standard FTPL equation to explain why countries with persistently negative primary surpluses can have a positively valued currency and low inflation. It also provides two illustrative models with closed-form solutions in which the return on government bonds is below the economy’s growth rate. The government can “mine” the bubble by perpetually rolling over its debt. The welfare maximizing bubble mining rate is independent of government spending, and additional spending needs should be financed exclusively through taxes. Despite the bubble, the price level remains determined provided government policy credibly promises primary surpluses off-equilibrium.
ftpl_with_a_bubble.pdf Brunnermeier, Markus K., Rohit Lamba, and Carlos Segura-Rodriguez. “
Inverse Selection”. Submitted. Print.
AbstractBig data, machine learning and AI inverts adverse selection problems. It allows insurers to infer statistical information and thereby reverses information advantage from the insuree to the insurer. In a setting with two-dimensional type space whose correlation can be inferred with big data we derive three results: First, a novel tradeoff between a belief gap and price discrimination emerges. The insurer tries to protect its statistical information by offering only a few screening contracts. Second, we show in a setting with naïve agents that do not perfectly infer statistical information from the price of offered contracts, price discrimination significantly boosts insurer’s profits. Third, introducing competition sucks out the informational advantage of the insurer, and forcing the monopolistic insurer to reveal its statistical information can be helpful to the insuree even though it may reduce total surplus. We also discuss the significance of our analysis through four stylized facts: the rise of data brokers, the perils of market concentration with advent of big data, the importance of consumer activism and regulatory forbearance, and the merits of a public data repository.
inverse_selection_bls_30dec2021.pdf
inverse_selection_slides_nber.pdf Abadi, Joseph, and Markus K. Brunnermeier. “
Blockchain Economics”. Submitted: n. pag. Print.
Abstract
When is record-keeping better arranged through a blockchain than through a traditional centralized intermediary? The ideal qualities of any record-keeping system are (i) correctness, (ii) decentralization, and (iii) cost efficiency. We point out a \textit{blockchain trilemma}: no ledger can satisfy all three properties simultaneously. A centralized record-keeper extracts rents due to its monopoly on the ledger. Its franchise value dynamically incentivizes correct reporting. Blockchains drive down rents by allowing for free entry of record-keepers and portability of information to competing ``forks.'' Blockchains must therefore provide static incentives for correctness through computationally expensive proof-of-work algorithms and permit record-keepers to roll back history in order to undo fraudulent reports. While blockchains can keep track of ownership transfers, enforcement of possession rights is often better complemented by centralized record-keeping.
blockchain_paper_v11f.pdf
BlockchainEconomics_slides_cesc.pdf Brunnermeier, Markus K., and Yann Koby. “
The Reversal Interest Rate”. (Submitted). Print.
Abstract
The reversal interest rate is the rate at which accommodative monetary policy reverses and becomes contractionary for lending. Its determinants are (i) banks' fixed-income holdings, (ii) the strictness of capital constraints, (iii) the degree of pass-through to deposit rates, and (iv) the initial capitalization of banks. Quantitative easing increases the reversal interest rate and should only be employed after interest rate cuts are exhausted. Over time the reversal interest rate creeps up since asset revaluation fades out as fixed-income holdings mature while net interest income stays low. We calibrate a New Keynesian model that embeds our banking frictions.
26d_rir_slides.pdf
25b_reversalrate.pdf