Brunnermeier, Markus K, and Yuliy Sannikov. “
The I Theory of Money”. Working Papers: n. pag. Print.
AbstractA 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.
The I Theory of Money Brunnermeier, Markus K., Sebastian Merkel, and Yuliy Sannikov. “
The Fiscal Theory of the Price Level with a Bubble”. Working Papers. 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 an example with closed-form solutions in which idiosyncratic risk on capital returns depresses the interest rate on government bonds below the economy's growth rate.
04a_ftpl_bubble_paper.pdf Brunnermeier, Markus K., Rohit Lamba, and Carlos Segura-Rodriguez. “
Inverse Selection”. Working Papers. 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 that forcing the insurance company to reveal its statistical information can be welfare improving. Third, we show in a setting with naive agents that do not perfectly infer statistical information from the price of offered contracts, price discrimination significantly boosts insurer's profits. We also discuss the significance our analysis through three stylized facts: the rise of data brokers, the importance of consumer activism and regulatory forbearance, and merits of a public data repository.
inverse_selection.pdf
inverse_selection_slides_nber.pdf Brunnermeier, Markus K., Harold James, and Jean-Pierre Landau. “
The Digitalization of Money”. Working Papers. Print.
AbstractThe ongoing digital revolution may lead to a radical departure from the traditional model of monetary exchange. We may see an unbundling of the separate roles of money, creating fiercer competition among specialized currencies. On the other hand, digital currencies associated with large platform ecosystems may lead to a re-bundling of money in which payment services are packaged with an array of data services, encouraging differentiation but discouraging interoperability between platforms. Digital currencies may also cause an upheaval of the international monetary system: countries that are socially or digitally integrated with their neighbors may face digital dollarization, and the prevalence of systemically important platforms could lead to the emergence of digital currency areas that transcend national borders. Central bank digital currency (CBDC) ensures that public money remains a relevant unit of account.
02c_digitalmoney.pdf Blickle, Kristian, Markus K. Brunnermeier, and Stephan Luck. “
Micro-Evidence From a System-Wide Financial Meltdown: The German Crisis of 1931”. (Working Papers). Web.
Publisher's VersionAbstractThis paper studies a major financial panic, the run on the German banking system in 1931, to distinguish between banking theories that view depositors as demanders of liquidity and those that view them as providers of discipline.
Our empirical approach exploits the fact that the German Crisis of 1931 was system-wide with cross-sectional variation in deposit flows as well as bank distress and took place in absence of a deposit insurance scheme.
We find that interbank deposit flows predict subsequent bank distress early on. In contrast, wholesale depositors are more likely to withdraw from distressed banks at later stages of the run and only after the interbank market has started to collapse. Retail deposits are---despite the absence of deposit insurance---largely stable. Our findings emphasize the heterogeneity in depositor roles, with discipline being best provided through the interbank market.
bankrun_germany1931_slides.pdf Abadi, Joseph, and Markus K. Brunnermeier. “
Blockchain Economics”. Working Papers: 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.
BlockchainEconomics_paper_v7a.pdf
BlockchainEconomics_slides_cesc.pdf Brunnermeier, Markus K., Pierre-Olivier Gourinchas, and Oleg Itskhoki. “
Consumption-led Growth”. (Working Papers). Web.
Publisher's Version
growth_ca_slides_bdf.pdf Arora, Sanjeev, et al. “
Computational Complexity and Information Asymmetry in Financial Products”. Working Papers. Print.
Abstract
Traditional economics argues that financial derivatives, like CDOs and CDSs, ameliorate the negative costs imposed by asymmetric information. This is because securitization via derivatives allows the informed party to find buyers for less information-sensitive part of the cash flow stream of an asset (e.g., a mortgage) and retain the remainder. In this paper we show that this viewpoint may need to be revised once computational complexity is brought into the picture. Using methods from theoretical computer science this paper shows that derivatives can actually amplify the costs of asymmetric information instead of reducing them. Note that computational complexity is only a small departure from full rationality since even highly sophisticated investors are boundedly rational due to a lack of requisite computational resources.
Complexity and Derivatives.pdf