Institutional Finance

Working Paper
Brunnermeier, Markus K, and Yuliy Sannikov. “The I Theory of Money”. Working Paper: n. pag. Print.Abstract

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.

The I Theory of Money
In Preparation
Brunnermeier, Markus K, and Ricardo Reis. “A Crash Course on the Euro Crisis”. (In Preparation). Print.Abstract

This paper provides a template for teaching the Euro crisis. It starts by stressing the importance of international capital flows that primarily fueled sectors with low productivity in the periphery. A key element of the crisis is that international capital flows were intermediated by banks and that most European banks rely heavily on less stable short-term wholesale funding. A sudden stop of this funding flows leads to fire-sales and a credit crunch. This is worsened by the ''diabolic loop'' between sovereign and banking risk. The paper addresses various liquidity policy measures and argues that insolvency issues are not addressed since fiscal authorities and monetary authority play a game of chicken about who should absorb the losses.

01b EuroCrashCourse_slides.pdf
Brunnermeier, Markus K, Gary Gorton, and Arvind Krishnamurthy. “Liquidity Mismatch”. Risk Topography. Chicago: University of Chicago Press, 2014. Print. liquidity_mismatch_slides.pdf Liquidity Mismatch.pdf
Macroeconomics with Financial Frictions: A Survey
Brunnermeier, Markus K, Thomas Eisenbach, and Yuliy Sannikov. “Macroeconomics with Financial Frictions: A Survey”. Advances in Economics and Econometrics, Tenth World Congress of the Econometric Society. New York: Cambridge University Press, 2013. Print.Abstract

This article surveys the macroeconomic implications of financial frictions. Financial frictions lead to persistence and when combined with illiquidity to non-linear amplification eects. Risk is endogenous and liquidity spirals cause financial instability. Increasing margins further restrict leverage and exacerbate the downturn. A demand for liquid assets and a role for money emerges. The market outcome is generically not even constrained ecient and the issuance of government debt can lead to a Pareto improvement. While financial institutions can mitigate frictions, they introduce additional fragility and through their erratic money creation harm price stability.

slides.pdf survey_macrofinance.pdf
Brunnermeier, Markus K, and Martin Oehmke. “The Maturity Rat Race”. Journal of Finance 68.2 (2013): , 68, 2, 483-521. Print.Abstract

We develop a model of endogenous maturity structure for financial institutions that borrow from multiple creditors. We show that a maturity rat race can occur: an individual creditor can have an incentive to shorten the maturity of his own loan to the institution, allowing him to adjust his financing terms or pull out before other creditors can. This, in turn, causes all other lenders to shorten their maturity as well, leading to excessively short-term financing. This rat race occurs when interim information is mostly about the probability of default rather than the recovery in default, and is most pronounced during volatile periods and crises. Overall, firms are exposed to unnecessary rollover risk.

Maturity Rat Race.pdf Maturity Rat Race Slides.pdf
Brunnermeier, Markus K, Gary Gorton, and Arvind Krishnamurthy. “Risk Topography”. NBER Macroeconomics Annual 2011 26 (2012): , 26, 149-176. Print.Abstract

The aim of this paper is to conceptualize and design a risk topography that outlines a data acquisition and dissemination process that informs policymakers, researchers and market participants about systemic risk. Our approach emphasizes that systemic risk (i) cannot be detected based on measuring cash instruments, e.g., balance sheet items or ratios such as leverage and income statement items; (ii) typically builds up in the background before materializing in a crisis; and (iii), is determined by market participants’ endogenous response to various shocks. Our measurement system asks that regulators elicit from market participants their (partial equilibrium) risk as well as liquidity sensitivities (our response indicator) with respect to major risk factors and liquidity scenarios. General equilibrium responses and economy-wide system effects can be calibrated using this panel data set.

risk_topography.pdf risk_topography_slides.pdf