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Discussion of
“I Theory of Money”
by Markus Brunnermeier and Yuly Sannikov
Javier Bianchi
Minneapolis Fed & NBER
Central Bank of Korea
Not the opinion of the Federal Reserve
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Overview
Goal: a unified framework to study financial stability and
price stability
Interesting paper at the intersection of money, banking &
macro!
Can’t do justice to the paper in 10’..
2 / 12
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Overview
Goal: a unified framework to study financial stability and
price stability
Interesting paper at the intersection of money, banking &
macro!
Can’t do justice to the paper in 10’..
2 / 12
![Page 4: I Theory of Money by Markus Brunnermeier and Yuly Sannikov · by Markus Brunnermeier and Yuly Sannikov Javier Bianchi Minneapolis Fed & NBER Central Bank of Korea Not the opinion](https://reader034.vdocuments.us/reader034/viewer/2022042919/5f626f35451833298f1a2c54/html5/thumbnails/4.jpg)
Outline of Discussion
Key Mechanisms
Illustration in Bewley’s model of fiat money, based on
Sargent-Wallace 1982, Ljungqvis-Sargent, CH 18
Outside money only
Inside and outside money
Effects of shocks to borrowing constraints and risk
Comments
Application/relevance of mechanism
Determinacy
3 / 12
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Basic Idea/Story
Intermediaries:
Liabilities denominated in monetary units
Exposed to aggregate shocks
Negative aggregate shocks leads to losses of intermediaries
1 Fire sales leading to lower asset prices
→ further losses in asset side
2 Lower money creation leading to lower price level
→ further losses on liability side
Downward spirals reinforce each other
Price stability and financial stability go hand in hand
4 / 12
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Basic Idea/Story
Intermediaries:
Liabilities denominated in monetary units
Exposed to aggregate shocks
Negative aggregate shocks leads to losses of intermediaries
1 Fire sales leading to lower asset prices
→ further losses in asset side
2 Lower money creation leading to lower price level
→ further losses on liability side
Downward spirals reinforce each other
Price stability and financial stability go hand in hand
4 / 12
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Basic Idea/Story
Intermediaries:
Liabilities denominated in monetary units
Exposed to aggregate shocks
Negative aggregate shocks leads to losses of intermediaries
1 Fire sales leading to lower asset prices
→ further losses in asset side
2 Lower money creation leading to lower price level
→ further losses on liability side
Downward spirals reinforce each other
Price stability and financial stability go hand in hand
4 / 12
![Page 8: I Theory of Money by Markus Brunnermeier and Yuly Sannikov · by Markus Brunnermeier and Yuly Sannikov Javier Bianchi Minneapolis Fed & NBER Central Bank of Korea Not the opinion](https://reader034.vdocuments.us/reader034/viewer/2022042919/5f626f35451833298f1a2c54/html5/thumbnails/8.jpg)
Basic Idea/Story
Intermediaries:
Liabilities denominated in monetary units
Exposed to aggregate shocks
Negative aggregate shocks leads to losses of intermediaries
1 Fire sales leading to lower asset prices
→ further losses in asset side
2 Lower money creation leading to lower price level
→ further losses on liability side
Downward spirals reinforce each other
Price stability and financial stability go hand in hand
4 / 12
![Page 9: I Theory of Money by Markus Brunnermeier and Yuly Sannikov · by Markus Brunnermeier and Yuly Sannikov Javier Bianchi Minneapolis Fed & NBER Central Bank of Korea Not the opinion](https://reader034.vdocuments.us/reader034/viewer/2022042919/5f626f35451833298f1a2c54/html5/thumbnails/9.jpg)
Basic Idea/Story
Intermediaries:
Liabilities denominated in monetary units
Exposed to aggregate shocks
Negative aggregate shocks leads to losses of intermediaries
1 Fire sales leading to lower asset prices
→ further losses in asset side
2 Lower money creation leading to lower price level
→ further losses on liability side
Downward spirals reinforce each other
Price stability and financial stability go hand in hand
4 / 12
![Page 10: I Theory of Money by Markus Brunnermeier and Yuly Sannikov · by Markus Brunnermeier and Yuly Sannikov Javier Bianchi Minneapolis Fed & NBER Central Bank of Korea Not the opinion](https://reader034.vdocuments.us/reader034/viewer/2022042919/5f626f35451833298f1a2c54/html5/thumbnails/10.jpg)
Basic Idea/Story
Intermediaries:
Liabilities denominated in monetary units
Exposed to aggregate shocks
Negative aggregate shocks leads to losses of intermediaries
1 Fire sales leading to lower asset prices
→ further losses in asset side
2 Lower money creation leading to lower price level
→ further losses on liability side
Downward spirals reinforce each other
Price stability and financial stability go hand in hand 4 / 12
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Bewley’s model of fiat money
Uninsurable idiosyncratic income shocks yt. Deterministic
agg. dynamics
Only outside money. Central bank sets {M st }∞0
Households
maxE0
∞∑t=0
βtu(ct)
ct +Mt+1
Pt
= yt +Mt
Pt
+ Tt, Mt+1 ≥ 0
Market clearing∫mt(mt, yt)dΓt(mt, yt) =
Mst+1
Pt+1
At SS with Pt = P , Em =M
P⇒ Quantity theory of money
5 / 12
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Bewley’s model of fiat money
Uninsurable idiosyncratic income shocks yt. Deterministic
agg. dynamics
Only outside money. Central bank sets {M st }∞0
Households
maxE0
∞∑t=0
βtu(ct)
ct +mt+1πt+1 = yt +mt + τt, mt+1 ≥ 0
Market clearing∫mt(mt, yt)dΓt(mt, yt) =
Mst+1
Pt+1
At SS with Pt = P , Em =M
P⇒ Quantity theory of money
5 / 12
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Bewley’s model of fiat money
Uninsurable idiosyncratic income shocks yt. Deterministic
agg. dynamics
Only outside money. Central bank sets {M st }∞0
Households
maxE0
∞∑t=0
βtu(ct)
ct +mt+1πt+1 = yt +mt + τt, mt+1 ≥ 0
Market clearing∫mt(mt, yt)dΓt(mt, yt) =
Mst+1
Pt+1
At SS with Pt = P , Em =M
P⇒ Quantity theory of money
5 / 12
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Bewley’s model of fiat money
Uninsurable idiosyncratic income shocks yt. Deterministic
agg. dynamics
Only outside money. Central bank sets {M st }∞0
Households
maxE0
∞∑t=0
βtu(ct)
ct +mt+1πt+1 = yt +mt + τt, mt+1 ≥ 0
Market clearing∫mt(mt, yt)dΓt(mt, yt) =
Mst+1
Pt+1
At SS with Pt = P , Em =M
P⇒ Quantity theory of money
5 / 12
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Bewley with Inside and Outside Money
Private money creation bt+1 (real notes)
ct+Mt+1
Pt
+ bt+1︸ ︷︷ ︸at+1
= bt +Mt
Pt︸ ︷︷ ︸at
+btr+yt+Tt, bt+1 ≥ −φ,Mt+1 ≥ 0
Inside and outside money are perfect substitutes
→ Monetary equilibrium 1 + rt = Pt+1
Pt→ Friedman Rule
Market clearing
∫at(a, y)dΓt(a, y)) =
M st+1
Pt+1
6 / 12
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Bewley with Inside and Outside Money
Private money creation bt+1 (real notes)
ct+Mt+1
Pt
+ bt+1︸ ︷︷ ︸at+1
= bt +Mt
Pt︸ ︷︷ ︸at
+btr+yt+Tt, bt+1 ≥ −φ,Mt+1 ≥ 0
Inside and outside money are perfect substitutes
→ Monetary equilibrium 1 + rt = Pt+1
Pt→ Friedman Rule
Market clearing
∫at(a, y)dΓt(a, y)) =
M st+1
Pt+1
6 / 12
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Bewley with Inside and Outside Money
Private money creation bt+1 (real notes)
ct+Mt+1
Pt
+ bt+1︸ ︷︷ ︸at+1
= bt +Mt
Pt︸ ︷︷ ︸at
+btr+yt+Tt, bt+1 ≥ −φ,Mt+1 ≥ 0
Inside and outside money are perfect substitutes
→ Monetary equilibrium 1 + rt = Pt+1
Pt→ Friedman Rule
Market clearing
∫at(a, y)dΓt(a, y)) =
M st+1
Pt+1
6 / 12
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Bewley with Inside and Outside Money
Private money creation bt+1 (real notes)
ct+Mt+1
Pt
+ bt+1︸ ︷︷ ︸at+1
= bt +Mt
Pt︸ ︷︷ ︸at
+btr+yt+Tt, bt+1 ≥ −φ,Mt+1 ≥ 0
Inside and outside money are perfect substitutes
→ Monetary equilibrium 1 + rt = Pt+1
Pt→ Friedman Rule
Market clearing
∫at(a, y)dΓt(a, y)) =
M st+1
Pt+1
6 / 12
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Lessons from Stationary Equilibria∫(a(a, y))dΓ(a, y)) =
M s
P, bt+1 ≥ −φ
1 What are the effects of tightening borrowing constraint ↓ φ?
Lower private money creation, ⇒ ↓ P
2 Increase in idiosyncratic risk?
Lower private money creation, ⇒ ↓ P
* Credit crunches lead to deflation
Feedback in paper require ↓ Pt
7 / 12
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Lessons from Stationary Equilibria∫(a(a, y))dΓ(a, y)) =
M s
P, bt+1 ≥ −φ
1 What are the effects of tightening borrowing constraint ↓ φ?
Lower private money creation, ⇒ ↓ P
2 Increase in idiosyncratic risk?
Lower private money creation, ⇒ ↓ P
* Credit crunches lead to deflation
Feedback in paper require ↓ Pt
7 / 12
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Lessons from Stationary Equilibria∫(a(a, y))dΓ(a, y)) =
M s
P, bt+1 ≥ −φ
1 What are the effects of tightening borrowing constraint ↓ φ?
Lower private money creation, ⇒ ↓ P
2 Increase in idiosyncratic risk?
Lower private money creation, ⇒ ↓ P
* Credit crunches lead to deflation
Feedback in paper require ↓ Pt
7 / 12
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Lessons from Stationary Equilibria∫(a(a, y))dΓ(a, y)) =
M s
P, bt+1 ≥ −φ
1 What are the effects of tightening borrowing constraint ↓ φ?
Lower private money creation, ⇒ ↓ P
2 Increase in idiosyncratic risk?
Lower private money creation, ⇒ ↓ P
* Credit crunches lead to deflation
Feedback in paper require ↓ Pt
7 / 12
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Lessons from Stationary Equilibria∫(a(a, y))dΓ(a, y)) =
M s
P, bt+1 ≥ −φ
1 What are the effects of tightening borrowing constraint ↓ φ?
Lower private money creation, ⇒ ↓ P
2 Increase in idiosyncratic risk?
Lower private money creation, ⇒ ↓ P
* Credit crunches lead to deflation
Feedback in paper require ↓ Pt
7 / 12
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Brunnermeir-Sannikov
Impressive! Aggregate shocks, not just stationary eq..
Richer portfolio: trade in safe and risky assets
Networth of intermediaries determine endogenous risk and
money creation
Feedback between money multiplier and financial sector
Extensions with long-term debt → valuation effects
Redistribution and insurance effects of monetary policy
Methods: (Brunnermeir-Sannikov, 2014). Full eq. dynamics also
in discrete time. Pros? Cons?
8 / 12
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Brunnermeir-Sannikov
Impressive!
Aggregate shocks, not just stationary eq..
Richer portfolio: trade in safe and risky assets
Networth of intermediaries determine endogenous risk and
money creation
Feedback between money multiplier and financial sector
Extensions with long-term debt → valuation effects
Redistribution and insurance effects of monetary policy
Methods: (Brunnermeir-Sannikov, 2014). Full eq. dynamics also
in discrete time. Pros? Cons?
8 / 12
![Page 26: I Theory of Money by Markus Brunnermeier and Yuly Sannikov · by Markus Brunnermeier and Yuly Sannikov Javier Bianchi Minneapolis Fed & NBER Central Bank of Korea Not the opinion](https://reader034.vdocuments.us/reader034/viewer/2022042919/5f626f35451833298f1a2c54/html5/thumbnails/26.jpg)
Brunnermeir-Sannikov
Impressive! Aggregate shocks, not just stationary eq..
Richer portfolio: trade in safe and risky assets
Networth of intermediaries determine endogenous risk and
money creation
Feedback between money multiplier and financial sector
Extensions with long-term debt → valuation effects
Redistribution and insurance effects of monetary policy
Methods: (Brunnermeir-Sannikov, 2014). Full eq. dynamics also
in discrete time. Pros? Cons?
8 / 12
![Page 27: I Theory of Money by Markus Brunnermeier and Yuly Sannikov · by Markus Brunnermeier and Yuly Sannikov Javier Bianchi Minneapolis Fed & NBER Central Bank of Korea Not the opinion](https://reader034.vdocuments.us/reader034/viewer/2022042919/5f626f35451833298f1a2c54/html5/thumbnails/27.jpg)
Brunnermeir-Sannikov
Impressive! Aggregate shocks, not just stationary eq..
Richer portfolio: trade in safe and risky assets
Networth of intermediaries determine endogenous risk and
money creation
Feedback between money multiplier and financial sector
Extensions with long-term debt → valuation effects
Redistribution and insurance effects of monetary policy
Methods: (Brunnermeir-Sannikov, 2014). Full eq. dynamics also
in discrete time. Pros? Cons?
8 / 12
![Page 28: I Theory of Money by Markus Brunnermeier and Yuly Sannikov · by Markus Brunnermeier and Yuly Sannikov Javier Bianchi Minneapolis Fed & NBER Central Bank of Korea Not the opinion](https://reader034.vdocuments.us/reader034/viewer/2022042919/5f626f35451833298f1a2c54/html5/thumbnails/28.jpg)
Brunnermeir-Sannikov
Impressive! Aggregate shocks, not just stationary eq..
Richer portfolio: trade in safe and risky assets
Networth of intermediaries determine endogenous risk and
money creation
Feedback between money multiplier and financial sector
Extensions with long-term debt → valuation effects
Redistribution and insurance effects of monetary policy
Methods: (Brunnermeir-Sannikov, 2014). Full eq. dynamics also
in discrete time. Pros? Cons?
8 / 12
![Page 29: I Theory of Money by Markus Brunnermeier and Yuly Sannikov · by Markus Brunnermeier and Yuly Sannikov Javier Bianchi Minneapolis Fed & NBER Central Bank of Korea Not the opinion](https://reader034.vdocuments.us/reader034/viewer/2022042919/5f626f35451833298f1a2c54/html5/thumbnails/29.jpg)
Brunnermeir-Sannikov
Impressive! Aggregate shocks, not just stationary eq..
Richer portfolio: trade in safe and risky assets
Networth of intermediaries determine endogenous risk and
money creation
Feedback between money multiplier and financial sector
Extensions with long-term debt → valuation effects
Redistribution and insurance effects of monetary policy
Methods: (Brunnermeir-Sannikov, 2014). Full eq. dynamics also
in discrete time. Pros? Cons?8 / 12
![Page 30: I Theory of Money by Markus Brunnermeier and Yuly Sannikov · by Markus Brunnermeier and Yuly Sannikov Javier Bianchi Minneapolis Fed & NBER Central Bank of Korea Not the opinion](https://reader034.vdocuments.us/reader034/viewer/2022042919/5f626f35451833298f1a2c54/html5/thumbnails/30.jpg)
Application/Relevance of Mechanism
Are intermediaries really exposed to deflation risk (TIPS,
options, etc)?
If they are, why do they expose themselves to
such risk? Or is it not a big risk in the first place? Good
policy?
No deflation nor Fisherian debt-deflation in US crisis. Drop
in money multiplier in US crisis was mainly due to increase
in reserve holdings (Bianchi-Bigio, 2013)?
Emerging markets: Alternative debt-deflation through foreign
currency and movements in real exchange rate might be more
relevant.
9 / 12
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Application/Relevance of Mechanism
Are intermediaries really exposed to deflation risk (TIPS,
options, etc)? If they are, why do they expose themselves to
such risk?
Or is it not a big risk in the first place? Good
policy?
No deflation nor Fisherian debt-deflation in US crisis. Drop
in money multiplier in US crisis was mainly due to increase
in reserve holdings (Bianchi-Bigio, 2013)?
Emerging markets: Alternative debt-deflation through foreign
currency and movements in real exchange rate might be more
relevant.
9 / 12
![Page 32: I Theory of Money by Markus Brunnermeier and Yuly Sannikov · by Markus Brunnermeier and Yuly Sannikov Javier Bianchi Minneapolis Fed & NBER Central Bank of Korea Not the opinion](https://reader034.vdocuments.us/reader034/viewer/2022042919/5f626f35451833298f1a2c54/html5/thumbnails/32.jpg)
Application/Relevance of Mechanism
Are intermediaries really exposed to deflation risk (TIPS,
options, etc)? If they are, why do they expose themselves to
such risk? Or is it not a big risk in the first place? Good
policy?
No deflation nor Fisherian debt-deflation in US crisis. Drop
in money multiplier in US crisis was mainly due to increase
in reserve holdings (Bianchi-Bigio, 2013)?
Emerging markets: Alternative debt-deflation through foreign
currency and movements in real exchange rate might be more
relevant.
9 / 12
![Page 33: I Theory of Money by Markus Brunnermeier and Yuly Sannikov · by Markus Brunnermeier and Yuly Sannikov Javier Bianchi Minneapolis Fed & NBER Central Bank of Korea Not the opinion](https://reader034.vdocuments.us/reader034/viewer/2022042919/5f626f35451833298f1a2c54/html5/thumbnails/33.jpg)
Application/Relevance of Mechanism
Are intermediaries really exposed to deflation risk (TIPS,
options, etc)? If they are, why do they expose themselves to
such risk? Or is it not a big risk in the first place? Good
policy?
No deflation nor Fisherian debt-deflation in US crisis. Drop
in money multiplier in US crisis was mainly due to increase
in reserve holdings (Bianchi-Bigio, 2013)?
Emerging markets: Alternative debt-deflation through foreign
currency and movements in real exchange rate might be more
relevant.
9 / 12
![Page 34: I Theory of Money by Markus Brunnermeier and Yuly Sannikov · by Markus Brunnermeier and Yuly Sannikov Javier Bianchi Minneapolis Fed & NBER Central Bank of Korea Not the opinion](https://reader034.vdocuments.us/reader034/viewer/2022042919/5f626f35451833298f1a2c54/html5/thumbnails/34.jpg)
Application/Relevance of Mechanism
Are intermediaries really exposed to deflation risk (TIPS,
options, etc)? If they are, why do they expose themselves to
such risk? Or is it not a big risk in the first place? Good
policy?
No deflation nor Fisherian debt-deflation in US crisis. Drop
in money multiplier in US crisis was mainly due to increase
in reserve holdings (Bianchi-Bigio, 2013)?
Emerging markets: Alternative debt-deflation through foreign
currency and movements in real exchange rate might be more
relevant. 9 / 12
![Page 35: I Theory of Money by Markus Brunnermeier and Yuly Sannikov · by Markus Brunnermeier and Yuly Sannikov Javier Bianchi Minneapolis Fed & NBER Central Bank of Korea Not the opinion](https://reader034.vdocuments.us/reader034/viewer/2022042919/5f626f35451833298f1a2c54/html5/thumbnails/35.jpg)
Note on (In)Determinacy
Monetary models often subject to indeterminacies (Sargent-Wallace
1975)
Take Bewley model with inside money (nominal bonds)
Ptct + qtBt+1 = Ptyt +Bt
Let qt = qtPt+1
Pt, bt = Bt/Pt
Market clearing∫bt+1(bt, yt)Γt(bt, yt) = 0
Multiple paths of prices consistent with sequence of q∗t
But initial P0 has redistributive effects bt = Bt/Pt → {q∗t }
Important difference in the paper seems to be outside money.
Clarify determinacy of Pt— key for deflation spiral
10 / 12
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Note on (In)Determinacy
Monetary models often subject to indeterminacies (Sargent-Wallace
1975)
Take Bewley model with inside money (nominal bonds)
Ptct + qtBt+1 = Ptyt +Bt
Let qt = qtPt+1
Pt, bt = Bt/Pt
Market clearing∫bt+1(bt, yt)Γt(bt, yt) = 0
Multiple paths of prices consistent with sequence of q∗t
But initial P0 has redistributive effects bt = Bt/Pt → {q∗t }
Important difference in the paper seems to be outside money.
Clarify determinacy of Pt— key for deflation spiral
10 / 12
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Note on (In)Determinacy
Monetary models often subject to indeterminacies (Sargent-Wallace
1975)
Take Bewley model with inside money (nominal bonds)
ct + qtbt+1 = yt + bt
Let qt = qtPt+1
Pt, bt = Bt/Pt
Market clearing∫bt+1(bt, yt)Γt(bt, yt) = 0
Multiple paths of prices consistent with sequence of q∗t
But initial P0 has redistributive effects bt = Bt/Pt → {q∗t }
Important difference in the paper seems to be outside money.
Clarify determinacy of Pt— key for deflation spiral
10 / 12
![Page 38: I Theory of Money by Markus Brunnermeier and Yuly Sannikov · by Markus Brunnermeier and Yuly Sannikov Javier Bianchi Minneapolis Fed & NBER Central Bank of Korea Not the opinion](https://reader034.vdocuments.us/reader034/viewer/2022042919/5f626f35451833298f1a2c54/html5/thumbnails/38.jpg)
Note on (In)Determinacy
Monetary models often subject to indeterminacies (Sargent-Wallace
1975)
Take Bewley model with inside money (nominal bonds)
ct + qtbt+1 = yt + bt
Let qt = qtPt+1
Pt, bt = Bt/Pt
Market clearing∫bt+1(bt, yt)Γt(bt, yt) = 0
Multiple paths of prices consistent with sequence of q∗t
But initial P0 has redistributive effects bt = Bt/Pt → {q∗t }
Important difference in the paper seems to be outside money.
Clarify determinacy of Pt— key for deflation spiral
10 / 12
![Page 39: I Theory of Money by Markus Brunnermeier and Yuly Sannikov · by Markus Brunnermeier and Yuly Sannikov Javier Bianchi Minneapolis Fed & NBER Central Bank of Korea Not the opinion](https://reader034.vdocuments.us/reader034/viewer/2022042919/5f626f35451833298f1a2c54/html5/thumbnails/39.jpg)
Note on (In)Determinacy
Monetary models often subject to indeterminacies (Sargent-Wallace
1975)
Take Bewley model with inside money (nominal bonds)
ct + qtbt+1 = yt + bt
Let qt = qtPt+1
Pt, bt = Bt/Pt
Market clearing∫bt+1(bt, yt)Γt(bt, yt) = 0
Multiple paths of prices consistent with sequence of q∗t
But initial P0 has redistributive effects bt = Bt/Pt → {q∗t }
Important difference in the paper seems to be outside money.
Clarify determinacy of Pt— key for deflation spiral
10 / 12
![Page 40: I Theory of Money by Markus Brunnermeier and Yuly Sannikov · by Markus Brunnermeier and Yuly Sannikov Javier Bianchi Minneapolis Fed & NBER Central Bank of Korea Not the opinion](https://reader034.vdocuments.us/reader034/viewer/2022042919/5f626f35451833298f1a2c54/html5/thumbnails/40.jpg)
Note on (In)Determinacy
Monetary models often subject to indeterminacies (Sargent-Wallace
1975)
Take Bewley model with inside money (nominal bonds)
ct + qtbt+1 = yt + bt
Let qt = qtPt+1
Pt, bt = Bt/Pt
Market clearing∫bt+1(bt, yt)Γt(bt, yt) = 0
Multiple paths of prices consistent with sequence of q∗t
But initial P0 has redistributive effects bt = Bt/Pt → {q∗t }
Important difference in the paper seems to be outside money.
Clarify determinacy of Pt— key for deflation spiral10 / 12
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Policy
Liquidity spirals and deflation spirals cause “excessive
borrowing”
Would be interesting to study how the benefits from
macroprudential policy vary when monetary policy is
conducted optimally
Models of optimal macroprudential policy typically abstract
from monetary policy (Lorenzoni, 2008; Bianchi, 2011;
Bianchi-Mendoza 2013)
Time inconsistency aspects of monetary and macropru?
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Conclusions
Very nice and interesting paper!
Elegant model providing a unified framework for the study of
price and financial stability
Clarify price level determination
Quantitative?
Optimal Policy? Macroprudential tools?
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Conclusions
Very nice and interesting paper!
Elegant model providing a unified framework for the study of
price and financial stability
Clarify price level determination
Quantitative?
Optimal Policy? Macroprudential tools?
12 / 12