Safe Assets. The I Theory of Money. with Valentin Haddad. - Money & Banking with Asset Pricing Tools - with Yuliy Sannikov. Princeton University

Transcription

1 Safe ssets with Valentin Haddad The I Theory of Money - Money & Banking with sset Pricing Tools - with Yuliy Sannikov Princeton University World Finance Conference New York City, July 30 th, 2016

2 Definitions of Safe sset 1. Safe = risk-free for a particular horizon But inflation risk E.g. holders are infinitely risk aversion - Caballero & Farhi 2. Safe = informationally insensitive No decline in value due to asymmetric info 3. Safe = Good friend analogy Safe for random horizon ppreciates in times of crisis Safe = Safe sset Tautology Safe because perceived to be safe (multiple equilibria) Bubble Brunnermeier & Haddad

3 Definitions of Safe sset 1. Safe = risk-free for a particular horizon E.g. holders are infinitely risk aversion but inflation risk 2. Safe = informationally insensitive No decline in value due to asymmetric info Caballero & Farhi Holmstrom & Gordon 3. Safe = Good friend analogy Safe for random horizon ppreciates in times of crisis Safe = Safe sset Tautology Safe because perceived to be safe (multiple equilibria) Bubble Brunnermeier & Haddad

4 Safe asset & money - close cousins Store of value store of value Safe asset Pool of risky high yield assets Deposits Equity Held in addition to risky assets Held in order to produce (private) safe assets (by banks!) Reference/benchmark asset Good collateral: stable margins Facilitates financial trade unit of account transaction role

5 Safety versus Risk US Treasury downgraded by S&P (due to default risk) but yield declines German CDS spread versus yield during Euro crisis

6 Money and Banking (in macro-finance) Money Banking store of value/safe asset diversifier holds risky assets, issues inside money mplification/endogenous risk dynamics Value of capital declines due to fire-sales Flight to safety Value of money rises iquidity spiral Disinflation spiral a la Fisher Demand for money rises less idiosyncratic risk is diversified Supply for inside money declines less creation by intermediaries Endogenous money multiplier = f(capitalization of critical sector) Paradox of Thrift (in risk terms) Monetary Policy (redistributive)

7 Money and Banking (in macro-finance) Money Banking store of value/safe asset diversifier holds risky assets, issues inside money mplification/endogenous risk dynamics Value of capital declines due to fire-sales Flight to safety Value of money rises iquidity spiral Disinflation spiral a la Fisher Demand for money rises less idiosyncratic risk is diversified Supply for inside money declines less creation by intermediaries Endogenous money multiplier = f(capitalization of critical sector) Paradox of Prudence Paradox of Thrift (in risk terms) Monetary Policy (redistributive)

8 Money and Banking (in macro-finance) Money Banking store of value/safe asset diversifier holds risky assets, issues inside money mplification/endogenous risk dynamics Value of capital declines due to fire-sales Flight to safety Value of money rises iquidity spiral Disinflation spiral a la Fisher Demand for money rises less idiosyncratic risk is diversified Supply for inside money declines less creation by intermediaries Endogenous money multiplier = f(capitalization of critical sector) Paradox of Prudence Paradox of Thrift (in risk terms) Monetary Policy (redistributive)

9 Risk, Monetary & Macropru Policy Risk Exogenous risk Sector-specific Idiosyncratic Endogenous risk Shifts in wealth share Variation in risk premia systematic cash flow risk systemic risk Risk management Monetary policy as risk transfer ffects (relative) asset prices reduces systemic risk Macroprudential policy ffects/limits quantities/risk taking

10 Roadmap Safe assets and money: close cousins Model absent monetary policy Toy model: one sector with outside money Two sector model with outside money dding intermediary sector and inside money Model with monetary policy The Curse of Safe ssets ESBies: securitization and safe assets

11 One sector basic model Technologies a 1 Each household can only operate one firm Physical capital dk t = (Φ ι k t δ)dt + σ a dz a a t + σd Z t t Output y t = k t Demand for money sector idiosyncratic risk

12 Net worth dding outside money q t K t value of physical capital Postulate constant q t ι q dt + Φ(ι δ) dt + σb dz t b + σd Z t b p t K t value of outside money Postulate value of money changes proportional to K t Outside Money Technologies a Money 1 Each household can only operate one firm Physical capital dk t = (Φ ι k t δ)dt + σ a dz a a t + σd Z t t Output y t = k t Demand for money sector idiosyncratic risk

13 Net worth dding outside money qk t value of physical capital dr a = ι dt + Φ(ι δ) dt + q σa dz a a t + σd Z t pk t value of outside money dr M = Φ(ι δ) dt + σ a a dz t Outside Money Technologies a g Money 1 Each household can only operate one firm Physical capital dk t = (Φ ι k t δ)dt + σ a dz a a t + σd Z t t Output y t = k t Demand for money sector idiosyncratic risk

14 Net worth Demand with E 0 e ρt log c t dt qk t value of physical capital dr a = ι dt + Φ(ι δ) dt + q σa dz a a t + σd Z t pk t value of outside money dr M = Φ(ι δ) dt + σ a a dz t g Outside Money Technologies a Consumption demand: ρ p + q K t = ι K t sset (share) demand x a : dn t a Money E dr a dr M /dt = Cov[dr a dr M, a ] = xa σ2 ตn t dr M +x a dr a dr M x a = E dra dr M /dt σ 2 = ( ι)/q σ 2 = q q+p Investment rate: (Tobin s q) Φ ι = 1/q For Φ ι = 1 κ log(κι + 1) ι = q 1 κ 1

15 Net worth Demand with log-utility qk t value of physical capital dr a = ι dt + Φ(ι δ) dt + q σa dz a a t + σd Z t pk t value of outside money dr M = Φ(ι δ) dt + σ a a dz t g Outside Money Technologies a Consumption demand: ρ p + q K t = ι K t sset (share) demand x a : dn t a Money E dr a dr M /dt = Cov[dr a dr M, a ] = xa σ2 ตn t dr M +x a dr a dr M x a = E dra dr M /dt σ 2 = ( ι)/q σ 2 = q q+p Investment rate: (Tobin s q) Φ ι = 1/q For Φ ι = 1 κ log(κι + 1) ι = q 1 κ 1

16 Net worth Demand with log-utility qk t value of physical capital dr a = ι dt + Φ(ι δ) dt + q σa dz a a t + σd Z t pk t value of outside money dr M = Φ(ι δ) dt + σ a a dz t g Outside Money Technologies a Consumption demand: ρ p + q K t = ι K t sset (share) demand x a : dn t a Money E dr a dr M /dt = Cov[dr a dr M, a ] = xa σ2 ตn t dr M +x a dr a dr M x a = E dra dr M /dt = ( ι)/q = q σ 2 σ 2 q+p Investment rate: (Tobin s q) Φ ι = 1/q For Φ ι = 1 κ log(κι + 1) ι = q 1 κ 1

17 Net worth Market clearing qk t value of physical capital dr a = ι dt + Φ(ι δ) dt + q σa dz a a t + σd Z t pk t value of outside money dr M = Φ(ι δ) dt + σ a a dz t g Outside Money Technologies a Consumption demand: ρ p + q K t = ι K t sset (share) demand x a : dn t a Money E dr a dr M /dt = Cov[dr a dr M, a ] = xa σ2 ตn t dr M +x a dr a dr M x a = E dra dr M /dt = ( ι)/q = q σ 2 σ 2 q+p Investment rate: (Tobin s q) Φ ι = 1/q For Φ ι = 1 κ log(κι + 1) ι = q 1 κ 1

18 Equilibrium Moneyless equilibrium p 0 = 0 Money equilibrium p = σ ρ ρ q q 0 = κ+1 κρ+1 > q = κ+1 κ ρσ+1 q 0 p q 0 ρ σ

19 Welfare analysis Moneyless equilibrium p 0 = 0 Money equilibrium p = σ ρ ρ q q 0 = κ+1 κρ+1 > q = κ+1 g 0 welfare 0 > < κ ρσ+1 g welfare

20 Roadmap Safe assets and money: close cousins Model absent monetary policy Toy model: one sector with outside money Two sector model with outside money dding intermediary sector and inside money Model with monetary policy The Curse of Safe ssets ESBies: securitization and safe assets

21 Outline of two sector model Technologies b Technologies a 1 B Households have to Switch Switch technology Specialize in one subsector Demand for money sector specific + idiosyncratic risk for one period dk t = dt + σ b dz b b dk t k t + σd Z t = dt + σ a dz a a t + σd Z t t k t

22 Net worth Net worth dd outside money Technologies b Outside Money Technologies a Money Money B 1 1 Switch Switch technology Households have to Specialize in one subsector for one period Demand for money

23 Roadmap Safe assets and money: close cousins Model absent monetary policy Toy model: one sector with outside money Two sector model with outside money dding intermediary sector and inside money Model with monetary policy The Curse of Safe ssets ESBies: securitization and safe assets

24 Roadmap Model absent monetary policy Toy model: one sector with outside money Two sector model with outside money dding intermediary sector and inside money Model with monetary policy Model with macro-prudential policy

25 Net worth Net worth dd intermediaries Technologies b Outside Money Technologies a Net worth Money Money B 1 1 Risk can be partially sold off to intermediaries Risk is not contractable (Plagued with moral hazard problems)

26 Net worth Net worth dd intermediaries Technologies b Outside Money Technologies a Net worth Money Money B 1 1 Intermediaries Can hold outside equity & diversify within sector b Monitoring

27 Inside equity Net worth dd intermediaries Technologies b Outside Money Technologies a Money Money B 1 Net worth 1 Intermediaries Can hold outside equity & diversify within sector b Monitoring

28 Inside equity HH Net worth dd intermediaries Technologies b Outside Money Pass through Outside Money Technologies a Money Inside Money (deposits) B 1 Net worth Money 1 Intermediaries Can hold outside equity & diversify within sector b Monitoring Create inside money Maturity/liquidity transformation

29 Inside equity HH Net worth Shock impairs assets: 1 st of 4 steps Technologies b Outside Money Pass through Technologies a Money Inside Money (deposits) B 1 Net worth osses Money 1

30 Inside equity HH Net worth Shrink balance sheet: 2 nd of 4 steps Technologies b Money Deleveraging Deleveraging Outside Money Pass through Inside Money Inside Money (deposits) (deposits) Technologies a B 1 1 Net worth osses Money 1 Switch Paradox of Prudence

31 Inside equity HH Net worth iquidity spiral: asset price drop: 3 rd of 4 Technologies b Money Deleveraging Outside Money Deleveraging Pass through Inside Money Inside Money (deposits) (deposits) Technologies a B 1 1 Net worth osses Money 1 Switch

32 Inside equity HH Net worth Disinflationary spiral: 4 th of 4 steps Technologies b Money Deleveraging Deleveraging Outside Money Pass through Inside Money Inside Money (deposits) (deposits) Technologies a B 1 1 Net worth osses Money 1

33 after an adverse shock Intermediaries are hit and shrink their balance sheets inducing sset side liquidity spiral financial stability iability side disinflation spiral price stability Response of intermediaries to adverse shock leads to endogenous risk mplification Persistence Other sectors can also be undercapitalized Japan 1980: US 2000s: corporate sector household sector

34 llocation Equilibrium is a map Histories of shocks prices q t, p t, λ t, allocation Z τ, 0 τ t α t, χ t & portfolio weights (x t, x t a, x t b ) wealth distribution η t = N t (p t +q t )K t 0,1 intermediaries wealth share ll agents maximize utility Choose: portfolio, consumption, technology ll markets clear Consumption, capital, money, outside equity of b

35 Numerical example: prices p, q 1.5 iquidity spiral q Disinflation spiral p

36 Numerical example: prices θ = p p+q p, q 1.5 iquidity spiral q Disinflation spiral p

37 Numerical example: dynamics of η fundamental volatility η x t (σ b 1 b σ K t ) σ t = 1 x t 1 1 θ t leverage θ η t θ/η t elasticity amplification Steady state

38 Volatility Paradox Steady state

39 Overview Safe assets No monetary economics Fixed outside money supply mplification/endogenous risk through iquidity spiral Disinflationary spiral Monetary policy asset side of intermediaries balance sheet liability side The Curse of Safe ssets ESBies: Creating Safety via Securitization

40 Redistributive MoPo: Ex-post perspective Outside Money Pass through Bonds b t K t χ t ψ t q t K t Inside Money (deposits) Net worth N t dverse shock value of risky claims drops Monetary policy Interest rate cut long-term bond price sset purchase asset price stealth recapitalization - redistributive risk premia iquidity & Deflationary Spirals are mitigated

41 Redistributive MoPo: Ex-post perspective Outside Money Pass through Bonds b t K t χ t ψ t q t K t Inside Money (deposits) Net worth N t dverse shock value of risky claims drops Monetary policy Interest rate cut long-term bond price sset purchase asset price stealth recapitalization - redistributive risk premia iquidity & Deflationary Spirals are mitigated

42 Monetary policy and endogenous risk Intermediaries risk (borrow to scale up) η x t (1 b σ b σ K t ) σ t = 1 + χ t ψ t η 1 η x η t t + θ t t η t amplification θ η t θ/η t fundamental risk b t p t mitigation B η t B(η t )/η t MoPo works through B η t B(η t )/η t with right monetary policy bond price B(η) rises as η drops stealth recapitalization Switch off liquidity and disinflationary spiral Example: Remove amplification s.t. σ t η = xt (1 b σ b σ t K )

43 Numerical example with monetary policy Prices q, with policy q, without policy q is more stable p, q p, without policy p, with policy p less disinflation

44 Overview Safe assets No monetary economics Fixed outside money supply mplification/endogenous risk through iquidity spiral Disinflationary spiral Monetary policy asset side of intermediaries balance sheet liability side The Curse of Safe ssets ESBies: Creating Safety via Securitization

45 The Curse of Safety with Haddad Investment equilibrium Safety equilibrium Safe asset Safe asset Pool of risky high yield assets Equity Risky assets Equity High real investment High market liquidity of risky assets ess safe asset holdings necessary ow real investment ow market liquidity of risky assets High safe asset holdings necessary

46 Overview Safe assets No monetary economics Fixed outside money supply mplification/endogenous risk through iquidity spiral Disinflationary spiral Monetary policy asset side of intermediaries balance sheet liability side The Curse of Safe ssets symmetrically supplied safe asset: ESBies solution

47 The two safe asset challenges Challenge 1: Safe asset + sovereign debt restructuring w/o diabolic loop French IMF/nglo-merican/German Challenge 2: No asymmetrically supplied safe asset German Bund 66

48 Cross-border flight to safety Today: asymmetric shifts across borders Value of German debt increases German CDS spread rises, but yield on bund drops (flight to quality) Value of Italian/Spanish/Greek sovereign debt declines With ESBies: Negative co-movement Value of ESBies expands Value of Junior bond shrinks sset side is more stable due to flight to quality due to increased risk 67

49 Solution: ESBies sovereign bonds ESBies Junior Bond Today: asymmetric shifts across borders Value of German debt increases German CDS spread rises, but yield on bund drops (flight to quality) Value of Italian/Spanish/Greek sovereign debt declines With ESBies: Negative co-movement across tranches Value of ESBies expands Value of Junior bond shrinks sset side is more stable due to flight to quality due to increased risk 68

50 Conclusion Safe assets Good friend analogy Safe asset tautology (multiple equilibria, bubble) Flight to safety Safe asset and Money are close cousins mplification & endogenous risk due to Paradox of Prudence iquidity spiral (fire sales etc.) Disinflationay spiral Redistributive monetary policy Ex-ante insurance -> MH requires MacroPru regulation Curse of safe assets ESBies symmetrically supplied for Europe

51 ESBies and more The Euro & The Battle of Ideas Markus K. Brunnermeier, Harold James & Jean-Pierre andau interests are interpret through the lens of ideas models