2016/08/01 by Markus K. Brunnermeier, Yuliy Sannikov · 2 citations
Economics, Econometrics and Finance · #Economic Theory and Policy #Economic theories and models #Banking stability, regulation, efficiency
paper · pdf · doi:10.3386/w22533
openalex publication_date 2016/08/01 · openalex created_date 2025/10/10 · openalex updated_date 2026/08/04
A theory of money needs a proper place for financial intermediaries. Intermediaries diversify risks and create inside money. In downturns, micro-prudent intermediaries shrink their lending activity, fire-sell assets and supply less inside money, exactly when money demand rises. The resulting Fisher disinflation hurts intermediaries and other borrowers. Shocks are amplified, volatility spikes and risk premia rise. Monetary policy is redistributive. Accommodative monetary policy that boosts assets held by balance sheet-impaired sectors, recapitalizes them and mitigates the adverse liquidity and disinflationary spirals. Since monetary policy cannot provide insurance and control risk-taking separately, adding macroprudential policy that limits leverage attains higher welfare.