Research

We propose a model of startup staged  financing where entrepreneurs choose between ICO and traditional entrepreneurial  finance sources such as Venture Capital (VC). While in early stages token sales allow startups to leverage network externalities by building a large customer base, VC's value-adding services enhance productivity in later stages. Due to complementarities between externality effects and value-adding services, the e cient solution to the entrepreneur's problem is to use both funding methods sequentially. However, lack of transparency in cryptocurrency markets prevents most startups from choosing the optimal funding path. A selection equilibrium arises where entrepreneurs with low-externality projects choose to raise VC capital only in order to avoid adverse selection in later stages. Using data on funding rounds of blockchain startups, we provide empirical evidence for both the complementarity assumption and the selection result.

Keywords: ICOs, Blockchain, Venture Capital, Network E ects, Cryptocurrencies, FinTech, Adverse Selection

JEL classi cation: G32, L26, D80

Relative bitcoin prices, across locations and currencies, are persistent over time, with the location component accounting for more than 50 percent of the variability. Their distribution is leptokurtic, with negative skewness for fiat pairs, and a standard deviation of 4.5%. Counter-party risks, liquidity risks, blockchain and cryptocurrency factors contribute to the overall explanation of the distribution of bitcoin prices, while the variability of mining activities is the only factor that explains both the time-series and spatial dimensions. We build a model with heterogeneous investors, partially segmented markets, and a slow moving market-maker, to interpret these results.

Keywords: cryptocurrencies; limits to arbitrage; mining; multi-market trading

JEL Classification: G14, G15, F31

We start by documenting large differences in bitcoin prices across exchanges located in different countries, or for different  at currency pairs. For the most reputable exchanges, and after carefully accounting for all the transaction costs and limitations to trade, we provide a risk-based explanation of these price differences. We  find that when investors bet on either the persistence or mean-reversion of these price differences, they are exposed to systematic crypto risk factors, and, in particular, to bitcoin liquidity, momentum, and counter-party aggregate risks, and earn low payoffs exactly in bad times for cryptocurrency markets. 

Keywords: cryptocurrencies; liquidity risk; momentum risk; counter-party risk

JEL Classi cation: G12, G14, G15, F31

In this paper we uncover a novel investment strategy on sovereign bonds issued by emerging countries and denominated in local currency. We show that by allocating bonds into portfolios with respect to their co-movement with the Carry currency risk factor, investors obtain a large cross-section of dollar excess returns. We find that most of these returns represent compensation for aggregate global risk. A standard, no-arbitrage affine model of defaultable long-term bonds in local currency with global and country-specific shocks can replicate these findings if there is sufficient heterogeneity in exposure to global shocks, bond maturities are short enough, and the global component of default risk is sufficiently homogenous across countries. 

Keywords:  local currency sovereign bonds; currency risk; term premium; default risk

JEL: F31, F34, G15 

Why has the financial sector expanded? Is this expansion socially desirable? Cross-country data suggests that the joint distribution of talent and wealth determines the size of the financial sector. I propose an occupational choice model with heterogeneous agents in terms of talent and wealth, matching friction, and private information to study a tradeoff between financial intermediation and production. Talent is important for both industry and finance: more talent in industry means more output production, while more talent in finance means more efficient capital allocation. First, the model predicts that the financial sector attracts too much talent. When agents make their occupational choice between finance and entrepreneurship, they do not internalize negative externalities that they impose on investors: the more bankers are the fewer talented entrepreneurs and great investment opportunities are. The efficiency can be restored by taxing the financial sector. Second, the model generates the simultaneous growth of wealth dispersion and the size of financial sector. Small wealth inequality between investors causes substantial income differences between entrepreneurs, which is translated into greater next period wealth inequality. Finally, the model qualitatively replicates the US data well: the growth of finance in employment and GDP, the increase in income inequality and the productivity slowdown. 

Keywords:  talent, financial sector, matching, productivity

JEL:  G14, E44, L26, O15

Several countries have already introduced restrictions on trading of cryptocurrencies,and many more are evaluating whether to follow suit. We document an unprecedented drop in trading volume on the Chinese cryptocurrency market after a recent regulatory change by the Chinese authorities that severely restricted bitcoin trading. This paper shows how changes in domestic regulation not only have large effects on the domestic cryptocurrency market but also produce large international spillovers. Specifically, we observe a large increase in trading volume and relative bitcoin prices in exchange for Korean won, Japanese yen, and U.S. dollars, and on Chinese peer-to-peer exchanges.

Keywords: bitcoin; trading volume; regulation; China

JEL Classi cation: G14, G15, G18

Emerging country governments increasingly issue bonds denominated in local currency and the share of this market held by foreign investors, once negligible, has been progressively growing. This paper presents a model of segmented markets, in which specialized foreign investors can access multiple local markets only after paying an entry cost. In the model, risk aversion of foreign investors is counter-cyclical and tied to U.S. short-term interest rate. We show that when foreign investors' risk aversion is sufficiently low, the benefits of investing in these new markets are greater than the entry costs. When we feed the actual U.S. interest rate data after the Great Recession, the model predicts a strong increase in the fraction of local currency debt held by foreign investors.

Keywords: sovereign debt, currency composition, emerging markets, market segmentation

JEL: E43, G12, F31, G11 

Empirical evidence shows that, in the vast majority of cases, governments default selectively on either home or foreign debt holdings. Yet, so far, no theoretical model has been proposed to explain this fact. We build a general equilibrium incomplete markets model with defaultable debt and two types of investors, domestic and foreign, to study the nature of selective default. The model analyses how the government optimally finances itself using three sources of funding: distortionary taxes, domestic debt and foreign debt. The government uses foreign borrowing to smooth output fluctuations. Consequently, foreign default is more likely in recessions, when a risk averse borrower finds it more costly to repay non-contingent debt. The government finds it optimal to use mostly domestic debt to smooth distortions. Domestic default is thus more likely when the tax distortions are high. Total default happens when high distortions coincide with a recession. Secondly, the model matches important data moments, in particular debt levels and the frequencies of different types of defaults. Thirdly, contrary to recent theoretical findings, we show that when taxes are distortionary, secondary markets are not sufficient to prevent sovereign defaults.

Keywords: sovereign debt, selective default, debt composition, secondary markets

JEL: F34, G15, H63, E43 

The bulk of the news shocks literature focuses on shocks materializing 4 or 5 quarters ahead. Moreover, there is little empirical evidence on news about longer-run events. We exploit a proprietary data set on giant mineral discoveries worldwide from 1950 to 2013. The median delay between the discovery of a mineral and its actual exploitation is 9 years. This is almost twice the delay reported in other commodity discovery data considered in the literature so far, and thus it allows to study news events with a longer horizon. We find that macroeconomic responses are delayed, with little or no action 3 years into the discovery. The benchmark model by Arezki, Ramey, and Sheng (2017) performs well in explaining this delay. We discuss other possible channels and implications for macroeconomics.

Keywords: Expectation shocks, limited foresight, myopia, small open economy RBC.

JEL: E23, Q33

We analyze the tight relationship between government debt, redistribution and capital taxation in Overlapping Generations Economies (OLG). We do so in an heterogeneous agents economy where the government collects capital and progressive labor taxes to pay government spending, debt and redistribute income. In this environment, the Ramsey planner uses all taxes, even in the long run. We show that rising inequality leads not only to more progressivity, but also to more government debt and capital taxation. The necessary increase in debt to achieve the optimal redistribution policy can be substantial. We explore how limits to government’s borrowing choices severely restricts its ability to redistribute income. We calibrate the model to the U.S. in the 2000-10 decade an estimate the optimal response to the observed change in inequality. We find the optimal level of debt should approximately doubled. 

Keywords: Government debt. Capital taxation. Redistribution. Progressive taxation.

JEL Classification: H2. H6 

The paper investigates the implications of globalization and reduced costs of tax avoidance through offshore accounts on optimal taxation. Over the past four decades, three notable trends have emerged: (i) a significant rise in wealth concentration, (ii) declining tax rates on capital and corporate income alongside increased consumption taxes, and (iii) increased ease of avoiding capital income taxes through offshore accounts. We add tax avoidance into a standard life-cycle model of consumption and savings, and study its implications for wealth inequality and the optimal design of the tax system. We calibrate the model to match the income and wealth distribution in the 1980s when the tax offshoring was very low, and choose the current tax avoidance costs to match the incidence of tax evasion across the wealth distribution in the recent period. We find that lower costs of tax avoidance amplifies the wealth concentration. The government responds optimally by reducing the taxation progressivity.  

Keywords:  Offshoring, Redistribution. Progressive taxation.

JEL Classification: H2. H6 

We compile a unique dataset consisting of disaggregated sectoral data from 10 sectors for 23 countries and 150 years to study the long-term trends and short-term fluctuations of world economic activities. We confirm the established patterns of structural change at the aggregate level, and further show that the rise of services is primarily driven by finance, real estate and communication services. Contrary to other countries, the US has experienced a faster decline in manufacturing and trade services and a more rapid expansion in finance. Furthermore, asset and commodity prices are important in explaining the fluctuations in sectoral shares, beyond what is usually attributed to GDP growth. We also find that crisis events tend to decelerate growing sectors, whilst accelerating declining ones.

Keywords: Structural change, growth, crises, commodity prices, interest rates

JEL Classification: O11, E32, N10, 014 

In an important model of growth and pollution proposed by Stokey [Int. Econ. Rev. 39 (1998) 1] neither the rate of economic growth nor the rate of growth of emissions depends on the time preference of the representative agent, which seems somewhat paradoxical. To resolve this paradox, we introduce into Stokey's model the assumption of dual-rate discounting, prove the existence of a sustainable balanced growth optimal path, and show that the growth rates of output and emissions are increasing in the proportion between the consumption and the environmental discount factors of the representative agent.

Keywords: growth, pollution, discounting

JEL:  O44, C61