Financial intermediaries in the theory of money
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Description: |
Sannikov, Y (Princeton University)
Wednesday 17 December 2014, 10:00-10:45 |
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Created: | 2014-12-22 16:48 |
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Collection: | Systemic Risk: Mathematical Modelling and Interdisciplinary Approaches |
Publisher: | Isaac Newton Institute |
Copyright: | Sannikov, Y |
Language: | eng (English) |
Distribution: | World (downloadable) |
Explicit content: | No |
Aspect Ratio: | 16:9 |
Screencast: | No |
Bumper: | UCS Default |
Trailer: | UCS Default |
Abstract: | Co-author: Markus BRUNNERMEIER (Princeton)
A theory of money needs a proper place for financial intermediaries. Intermediaries create inside money and their ability to take risks determines the money multiplier. In downturns, intermediaries shrink their lending activity and re-sell their assets. Moreover, they create less inside money. As the money multiplier shrinks, the value of money rises. This leads to a Fisher disinflation that hurts intermediaries and all other borrowers. The initial shock is amplified, volatility spikes up and risk premia rise. An accommodative monetary policy in downturns, focused on the assets held by constrained agents, recapitalizes intermediaries and hence mitigates these destabilizing adverse feedback effects. A monetary policy rule that accommodates negative shocks and tightens after positive shocks, provides an ex-ante insurance, mitigates financial frictions, reduces endogenous risk and risk premia but it also creates moral hazard. |
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