Procyclical Finance : The Money View

@inproceedings{Li2017ProcyclicalF,
  title={Procyclical Finance : The Money View},
  author={Ye Li and John Donaldson and Dong Beom Choi and Marco Negro and Christian Julliard and Arvind Krishnamurthy and Siyuan Liu and Marco Di Maggio and Emi Nakamura and Martin Oehmke and Tomasz Piskorski and J{\'o}n Bjarni Steinsson and Suresh M. Sundaresan},
  year={2017}
}
This paper offers a monetary theory of financial instability. Financial intermediaries’ debt supports trade by serving as a means of payment (“inside money”). Money creation stimulates growth: resources flow towards productive agents through transactions. Money creation also breeds instability: risk accumulates in booms through procyclical intermediary leverage. Under high leverage, even small shocks can significantly deplete intermediaries’ equity capital and drag the economy into a crisis. As… CONTINUE READING

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