Research
Publications
Journal of Money, Credit and Banking, forthcoming
with Christian Wipf
Abstract: We investigate how a positive relation between inflation and capital investment (the Mundell-Tobin effect) changes optimal monetary policy in a framework that combines overlapping generations and new Monetarist models. We find that inflation rates above the Friedman rule are optimal if and only if there is a Mundell-Tobin effect. In the absence of the Mundell-Tobin effect, the Friedman rule is optimal. With a Mundell-Tobin effect, increasing inflation above the Friedman rule leads to a first-order welfare gain from increasing capital investment, and only to a second-order welfare loss from reducing consumption in markets where liquidity matters.
European Economic Review 164, 2024.
with Zijian Wang
Abstract: Oligopolistic competition in the banking sector and risk in the real economy are important characteristics of many economies. We build a model of monetary policy transmission that incorporates these characteristics which allows us to analyze the long-run consequences of variations in the degree of banking competition. We show theoretically that various equilibrium cases can occur, and that the effect of monetary policy varies greatly across equilibrium cases. We calibrate the model to the U.S. economy in 2016-2019 and find that monetary policy pass-through is incomplete under imperfect competition. Further, we show that a decrease in the policy rate during the calibration period would have increased expected welfare, but also bank default probability.
Review of Economic Dynamics 51, 2023, 267-291.
with Kohei Iwasaki and Randall Wright
Abstract: This paper studies, analytically and numerically, economies with multiple liquid assets: fiat currency; fixed-supply real assets; and reproducible capital. Cases are considered where assets provide direct liquidity, and indirect liquidity via over-the-counter trade. The results shed new light on how monetary policy affects asset markets and investment. We also provide novel results on endogenous fluctuations (self-fulfilling prophecies), including coexistence of multiple equilibria with very different correlation and volatility patterns. Then we investigate if monetary policy can eliminate multiplicity. A calibration exercise assesses the impact on asset markets and on welfare of different policies, including changing inflation, and eliminating currency altogether.
International Economic Review 63 (4), 2022, 1527-1560.
Abstract: I develop a model where banks play a central role in monetary policy transmission. By credibly committing to repayment, banks can perform liquidity transformation. Illiquid assets may pay a liquidity premium because they allow banks to create liquid assets. The policy analysis discusses how the monetary authority can affect nominal rates and inflation when the fiscal authority follows nominal or real debt targets. A main result is that under a nominal debt target, the monetary authority is only able to increase inflation at the zero-lower bound by issuing money via lump-sum transfers, while doing so via bond purchases is ineffective.
Journal of International Money and Finance 115, 2021.
with Kohei Iwasaki and Randall Wright
Abstract: This paper reviews and extends recent research on liquidity and asset pricing. We start by asking how can intrinsically-worthless fiat money be valued in equilibrium? The literature on which we build formalizes how money is valued for its liquidity when exchange is hindered by various frictions. Once one sees how money can be priced above its fundamental value, it is clear that many other assets can be, too, if they also convey liquidity. We study under which conditions money can be valued if assets have fundamental value, how the liquidity values of money and assets interact, and how they are affected by changes in parameters such as acceptability, pledgeability, or the type of the asset.
Journal of Economic Theory 182, 2019, 329-359.
Abstract: This paper analyzes optimal monetary policy regarding asset markets in a model where money and savings are essential and asset markets matter. The model is able to explain why different regimes for the correlation of real interest rates and stock price-dividend ratios exist, and offers two explanations why the correlation vanished after 2007: A decrease in inflation or changes in the supply of risky and safe assets. The results on optimal policy show that away from the Friedman rule, fiscal policy can improve welfare by increasing the amount of outstanding government debt. If the fiscal authority is not willing or able to increase debt, the monetary authority can improve welfare of current generations by reacting procyclically to asset return shocks.
Quarterly Bulletin of the Swiss National Bank, 01/2015.
with Romain Baeriswyl
Abstract: This paper describes the balance sheet counterparts of the increase in Swiss franc deposits held by domestic banks at the SNB, and of the growth in Swiss franc deposits held by the public at domestic banks. It traces the growth in Switzerland’s monetary aggregates since 2008 to its various sources. The results indicate that about two-thirds of the increase in Swiss franc deposits held by the public at domestic banks results from loans granted by these banks to households and firms, whereas about one-third can be attributed directly to the market operations conducted by the SNB to expand the monetary base and thereby the banks’ liquidity.
Working Papers
with Hugo van Buggenum and Lukas Voellmy
Accepted at the Journal of Financial Economics
Abstract: We develop a general equilibrium model of self-fulfilling bank runs in a setting without aggregate risk. The key novelty is the way in which the banking system’s assets and liabilities are connected. Banks issue loans to entrepreneurs who sell goods to (impatient) households, which in turn pay for the goods by redeeming bank deposits. The return on bank assets is thus contingent on impatient households being able to withdraw their deposits. In a run, not all impatient households manage to withdraw since part of banks’ cash reserves end up in the hands of running patient households. This lowers revenues of entrepreneurs, which causes some of them to default on their loans and thereby rationalises the run in the first place. Importantly, interventions that restrict redemptions in a run – such as deposit freezes – can be self-defeating due to their negative effect on demand in goods markets. We show how runs may be prevented with combinations of deposit freezes and redemption penalties as well as with the provision of emergency liquidity by central banks.
E-Money and Liquidity (Draft available upon request)
with Louphou Coulibaly, Kohei Iwasaki, and Randall Wright
Abstract: This paper develops a framework to analyze when e-money can be valued for its direct or indirect liquidity, the latter meaning that it is not used as a payment instrument, but can potentially be traded for something that is. Analytical and numerical results are presented. In terms of theory, conditions are derived for intrinsically useless e-money to bevalued, depending on its properties and those of alternatives, like money issued by central or commercial banks. Endogenous fluctuations in e-money's value can emerge as self-fulfilling prophecies. Policy implications, and the notion that e-money may be a hedge against inflation, are discussed.
with Hugo van Buggenum and Lukas Voellmy
Abstract: We introduce banks that issue liquid deposits backed by bonds and capital into an otherwise standard cash-in-advance economy. Liquidity transformation by banks increases aggregate consumption and investment relative to a cash-only economy but can also lead to inefficient overinvestment. Furthermore, liquidity transformation can lead to multiple steady-state equilibria with different interest rates and real outcomes. Whenever multiple equilibria exist, one of them constitutes a `liquidity trap', in which nominal bond rates equal zero and banks are indifferent between holding bonds and reserves. Whether economic activity is higher in a liquidity trap or in a (coexisting) equilibrium with positive interest rates is ambiguous, but the liquidity trap equilibrium is more likely to go in hand with overinvestment.
Abstract: I build a general equilibrium model of the transmission of monetary policy on bank lending. Bank lending is done by individual banks that face random investment opportunities by creating inside money. Banks are subject to a reserve requirement and have access to the interbank money market. The model shows that lowering the money market rate relative to the inflation rate reduces investment and welfare. This is because the money market is an outside option for banks that face bad investment opportunities. Reducing the money market rate lowers the value of this outside option, which in turn reduces banks' willingness to acquire reserves ex-ante. This leads to less aggregate reserves, which reduces the banking system's ability to grant credit.
Work in Progress
Market Choice in Asset Trading: The Role of Collateral
with Piero Gottardi
Optimal Monetary Policy under Downward Nominal Wage Rigidities
with Mohammed Aït Lahcen and Stan Rabinovich
DAO Tokens and Decentralised Governance
with Cyril Monnet
Coexistence of Money and Credit in an Economy with Finite Lifespans
with Remo Taudien