Research

Some key effects of liquidity requirements and central bank interventions are transmitted through liquidity premia and the price of liquid assets, some agents prefer policies that do not fully relax their liquidity constraints because such policies are associated with higher prices, and combining liquidity requirements and central bank interventions limits the critique of liquidity requirements of Goodhart (2008).

Accounting for firms' deposits increases the optimal capital requirement on banks by 7.3 percentage points, in comparison to a comparable model in which all the deposits are held by households, and setting the capital requirement higher than the true optimum is not as costly as one would gauge from the comparable model. 

Systemic bank runs can arise when depositors withdraw deposits in anticipation of future runs. A sufficiently large monetary injection eliminates the runs, and the size of the injection depends on the tool used by the central bank to inject money into the economy.

Deposit insurance and certain central bank asset purchases are equivalent in the sense that they sustain the same allocation and generate the same costs for the government. If the government offers deposit insurance,  coexisting regulated and shadow intermediaries may arise endogenously.

The area under the long-run demand curve for money approximates the welfare cost of inflation for a very large class of inventory theoretical models of money demand.

The utility representation of the evolutionary optimal behavior, derived in a continuous-time biological model, differs substantially from those derived by the previous literature using discrete-time models.

Wisconsin School of Business Forward Thinking Blog: How We Face Risk: Personal Preference or Evolutionary Hardwiring?

Using Italian supervisory data, we show that widely used macroprudential regulations that rely on historical cost accounting (HCA)—to insulate banks’ balance sheets from financial market volatility—significantly affect the transmission of monetary policy. In addition, a drop in the market price of HCA-valued securities is equivalent to a reduction in capital requirements.

We document that households holdings of uninsured deposits are 21% of their total holdings, firms' holdings are 57% of their total holdings, and that the FDIC has consistently bailed out uninsured deposits—only 6% of bank failures resulted in losses on uninsured deposits from 2008 to 2022. We also explain how the FDIC is allowed to consistently bail out uninsured deposits despite its requirement to resolve failed banks using a "least-cost approach." We then incorporate these considerations into a quantitative general equilibrium model with insured and uninsured deposits, in which some of the deposits are held by firms. Had the government not bailed out uninsured deposits in 2023, we would have observed a negligible impact on the economy. The result is the byproduct of two forces that offset each other.

We provide a novel theory of fire sales based on the combination of resale frictions and liquidity risk. Equilibrium efficiency and policy implications differ substantially from those of other fire-sales models in the literature.

We assemble a dataset spanning 140 years with data about banks, firms’ investments, fiscal policy, and other macroeconomic and financial variables, and we show that a higher supply of Treasury securities reduces bank liabilities, bank lending, investments, labor market outcomes, and GDP. We use a simple model to derive policy implications. 

Private liquidity creation in the form of safe and risky debt is inefficient. We identify a novel externality related to liquidity premia and the cost of producing safe assets. The optimal policy requires to regulate both safe and risky debt, and regulation that targets only risky debt reduces welfare.