Redistributive Monetary Policy Markus K. Brunnermeier & Yuliy - PowerPoint PPT Presentation

The I Theory of Money & Redistributive Monetary Policy Markus K. Brunnermeier & Yuliy Sannikov Brunnermeier & Sannikov Princeton University Amsterdam, Nov. 20 th , 2015 Dutch Central Bank

Redistributive Monetary Policy (N (New) Keynesia ian I Theory of of Money De Demand Man anagement Ri Risk (p (premiu ium) man anagement Stimulate aggregate consumption Alleviate balance sheet constraints Woodford Tobin (1982) BruSan Price stickiness & ZLB Both Financial Frictions Perfect capital markets Incomplete markets Representative Agent Heterogeneous Agents Cut 𝑗 Cut 𝑗 Cut 𝑗 or QE Reduces 𝑠 due to price Changes bond prices Changes asset prices stickiness Redistributes from Ex-post: Redistributes (depend on asset Consumption 𝑑 rises low MPC to high MPC holdings) consumers Brunnermeier & Sannikov Ex-ante: insurance -> reduces endogenous risk Yield curve: Expectation hypothesis -> impacts risk premia (Hanson- Stein,…) Moral hazard -> role for MacroPru Focus on levels Focus on levels and risk dynamics

Redistributive Monetary Policy (N (New) Keynesia ian I Theory of of Money De Demand Man anagement Ri Risk (p (premiu ium) man anagement Stimulate aggregate consumption Alleviate balance sheet constraints Woodford Tobin (1982) BruSan Price stickiness & ZLB Both Financial Frictions Perfect capital markets Incomplete markets Representative Agent Heterogeneous Agents Cut 𝑗 Cut 𝑗 Cut 𝑗 or QE Reduces 𝑠 due to price Changes bond prices Changes asset prices stickiness Redistributes from Ex-post: Redistributes (depend on asset Consumption 𝑑 rises low MPC to high MPC holdings) consumers Brunnermeier & Sannikov Ex-ante: insurance -> reduces endogenous risk Yield curve: Expectation hypothesis -> impacts risk premia (Hanson- Stein,…) Moral hazard -> role for MacroPru Focus on levels Focus on levels and risk dynamics

Redistributive Monetary Policy (N (New) Keynesia ian I Theory of of Money De Demand Man anagement Ri Risk (p (premiu ium) man anagement Stimulate aggregate consumption Alleviate balance sheet constraints Woodford Tobin (1982) BruSan Price stickiness & ZLB Both Financial Frictions Perfect capital markets Incomplete markets Representative Agent Heterogeneous Agents Cut 𝑗 Cut 𝑗 Cut 𝑗 or QE Reduces 𝑠 due to price Changes bond prices Changes asset prices stickiness Redistributes from Ex-post: Redistributes (depend on asset Consumption 𝑑 rises low MPC to high MPC holdings) consumers Brunnermeier & Sannikov Ex-ante: insurance -> reduces endogenous risk Yield curve: Expectation hypothesis -> impacts risk premia (Hanson- Stein,…) Moral hazard -> role for MacroPru Focus on levels Focus on levels and risk dynamics

Redistributive Monetary Policy (N (New) Keynesia ian I Theory of of Money De Demand Man anagement Ri Risk (p (premiu ium) man anagement Stimulate aggregate consumption Alleviate balance sheet constraints Woodford Tobin (1982) BruSan Price stickiness & ZLB Both Financial Frictions Perfect capital markets Incomplete markets Representative Agent Heterogeneous Agents Cut 𝑗 Cut 𝑗 Cut 𝑗 or QE Reduces 𝑠 due to price Changes bond prices Changes asset prices stickiness Redistributes from Ex-post: Redistributes (depend on asset Consumption 𝑑 rises low MPC to high MPC holdings) consumers Brunnermeier & Sannikov Ex-ante: insurance -> reduces endogenous risk Yield curve: Expectation hypothesis -> impacts risk premia (Hanson- Stein,…) Moral hazard -> role for MacroPru Focus on levels Focus on levels and risk dynamics

Redistributive Monetary Policy (N (New) Keynesia ian I Theory of of Money De Demand Man anagement Ri Risk (p (premiu ium) man anagement Stimulate aggregate consumption Alleviate balance sheet constraints Woodford Tobin (1982) BruSan Price stickiness & ZLB Both Financial Frictions Perfect capital markets Incomplete markets Representative Agent Heterogeneous Agents Cut 𝑗 Cut 𝑗 Cut 𝑗 or QE Reduces 𝑠 due to price Changes bond prices Changes asset prices stickiness Redistributes from Ex-post: Redistributes (depend on asset Consumption 𝑑 rises low MPC to high MPC holdings) consumers Brunnermeier & Sannikov Ex-ante: insurance -> reduces endogenous risk Yield curve: Expectation hypothesis -> impacts risk premia (Hanson- Stein,…) Moral hazard -> role for MacroPru Focus on levels Focus on levels and risk dynamics

Roadmap  Redistribution via MoPo • A Money Model without Banks • Banks as “Money Creators” & “Risk Mitigators ” • Amplification in 4 Steps • Ex-post Redistribution: Money vs. Credit View  Special Role of Long-term Safe Bond • Ex-ante Perspective: Risk-transfer (Insurance) • MacroPru Allows more Aggressive MoPo  Defaultable government bond • Role of Financial Sector Brunnermeier & Sannikov  Insurer (if strict MacroPru)  Hostage – but diabolic loop  ESBies

A Money Model without Intermediaries  Store of value: Money pays no dividend and is a bubble • Value of money and of capital is endogenous \Fric ictio ion OL OLG deterministic endowment risk borrowing constraint Only money Samuelson  With intermediaries/inside money With capital Diamond Brunnermeier & Sannikov • “Money view” (Friedman & Schwartz) vs. “Credit view”(Tobin)  New Keynesian Models: BGG, Christian et al., … money in utility function

A Money Model without Intermediaries  Store of value: Money pays no dividend and is a bubble • Value of money and of capital is endogenous \Fric ictio ion OLG OL Incomple Inc lete Mark arkets + + idiosyncratic ic ri risk sk Risk deterministic endowment risk borrowing constraint Only money Samuelson Bewley With capital Diamond Aiyagari, Krusell-Smith Brunnermeier & Sannikov  With intermediaries/inside money • “Money view” (Friedman & Schwartz) vs. “Credit view”(Tobin)  New Keynesian Models: BGG, Christian et al., … money in utility function

A Money Model without Intermediaries  Store of value: Money pays no dividend and is a bubble • Value of money and of capital is endogenous \Fric ictio ion OL OLG Incomple Inc lete Mark arkets + + idiosyncratic ic ri risk sk Risk deterministic endowment risk investment risk borrowing constraint Only money Samuelson Bewley With capital Diamond Aiyagari, Krusell-Smith Basic “I Theory” Brunnermeier & Sannikov  Portfolio choice • Invest in own firm output/dividend yield but idio risk • Hold money no dividend no idio risk

Endogenous Value of Money and Capital 𝑟 0 𝑞 value of money 𝑟 value of capital (per unit) 0 𝜏 𝜍 idiosyncratic risk  Higher idiosyncratic risk 𝜏 Brunnermeier & Sannikov • Lower price of physical capital 𝑟 • Higher value of money 𝑞

Endogenous Value of Money and Capital Time preference 𝑟 0 𝑞 = 𝜏− 𝜍 𝜍 𝑟 𝑞 value of money TFP 𝜆𝐵+1 𝑟 value of capital 𝑟 = 𝜆 𝜍 𝜏+1 (per unit) 0 Adjustment cost 𝜏 𝜍 idiosyncratic risk  Higher idiosyncratic risk 𝜏 Brunnermeier & Sannikov • Lower price of physical capital 𝑟 • Higher value of money 𝑞

Roadmap  Redistribution via MoPo • A Money Model without Banks • Banks as “Money Creators” & “Risk Mitigators ” • Amplification in 4 Steps • Ex-post Redistribution: Money vs. Credit View  Special Role of Long-term Safe Bond • Ex-ante Perspective: Risk-transfer (Insurance) • MacroPru Allows more Aggressive MoPo  Defaultable government bond • Contingent commitment dilemma Brunnermeier & Sannikov • Role of Financial Sector  Insurer (if strict MacroPru)  Hostage – but diabolic loop  ESBies

Add intermediaries Outside Money  Technologies 𝑐  Technologies 𝑏 A L A L A L A L Risky Claim A L Risky Claim Risky Claim A L A L A L Risky Claim … Money Inside equity Risky Claim Risky Claim Net worth Money Net worth 𝐶 1 𝐵 1  Intermediaries • Can hold outside equity Brunnermeier & Sannikov & diversify within sector 𝑐 • Monitoring

Add intermediaries Outside Money  Technologies 𝑐  Technologies 𝑏 A L A L A L A L Risky Claim A L Risky Claim Risky Claim A L A L A L Risky Claim … Money Inside equity Risky Claim Risky Claim Net worth Money Net worth 𝐶 1 𝐵 1  Intermediaries • Can hold outside equity Brunnermeier & Sannikov & diversify within sector 𝑐 • Monitoring

Add intermediaries Outside Money  Technologies 𝑐  Technologies 𝑏 A L Outside Money Pass through A L A L Inside Money A L Risky Claim A L Risky Claim Risky Claim A L A L (deposits) A L Risky Claim … Money Inside equity Risky Claim HH Net worth Risky Claim Money Net worth 𝐶 1 𝐵 1  Intermediaries • Can hold outside equity Brunnermeier & Sannikov & diversify within sector 𝑐 • Monitoring • Create inside money • Maturity/liquidity transformation