The I Theory of Money

This lecture series is based on Brunnermeier and Sannikov’s research papers “The I Theory of Money” and “Redistributive Monetary Policy

How does the financial sector work?

Part 1 explains how (i) banks create (inside) money, (ii) banks' equity provides a cushion against default/credit risk, (iii) liquid safe asset holdings protect the bank against liquidity/run risk.

How does it cope with an adverse shock?

Part 2 explains debt run-ups and how endogenous risk arises from the (i) the Liquidity Spiral, and (ii) the Disinflationary Spiral. It also defines the (iii) Paradox of Prudence, it's relation to Keynes' Paradox of Thrift. These amplifications lead to endogenous (self-generated) systemic risk.

Redistributive Monetary Policy

Part 3 focuses on monetary policy. It first contrasts the money and the credit view. Monetary policy redistributes wealth, ideally to the sector which is balance sheet constraint.

Risky Government Debt, Diabolic Loop, Stability and Dominance Concepts

Part 4 introduces (i) three stability concepts, (ii) three dominance concepts, (iii) game of chicken between fiscal and monetary authorities, and (iv) diabolic (doom) loop between banking and sovereign risk.