Research

The Monetary Policy Haircut Rule
With Hans Gersbach (ETH Zurich)

We derive monetary-policy haircut rules by embedding a banking model into a two-sector neoclassical model. Banks rely on central-bank reserve loans that are collateralized according to the central bank’s collateral framework. We offer simple rules for optimal static and dynamic haircuts that balance the efficient allocation of capital across sectors and bank-default costs. We calibrate the model to the U.S. and find ranges for haircuts between 5 percent to 20 percent, considering numerical scenarios for capital-ownership shares, bank leverage, and productivity risk. Varying haircuts have also distributional effects: bondholders and workers may suffer from large haircuts, whilst bankers benefit despite reduced leverage. (CEPR Discussion Paper)

Credit Enforcement and Monetary-Policy Transmission in a Search Economy
With Hugo van Buggenum (ETH Zurich) and Hans Gersbach (ETH Zurich)

We study how the degree of enforcement in financial intermediation affects the transmission of monetary policy in a model with directed and competitive search. The sellers in the search market borrow against their income, and intermediaries sell the arising claims as private money to the buyers in the search market, who use it along with public money. Inflation incentivizes borrowing by curbing real interest rates. With simple enforcement of sellers’ promises, the usual negative effect of inflation is reinforced—once indebted, sellers take decisions that decelerate trade. With sophisticated enforcement, the opposite holds: to borrow more, sellers commit to actions that accelerate trade. We calibrate our model with U.S. data. Moving from the Friedman rule to 3 percent inflation accelerates trade by 14 percent, but reduces GDP by 3 percent. Without intermediation, trade decelerates by 25 percent and GDP reduces by 10 percent. (Working Paper)

Monetary Policy, Capital Requirements, and Private Money Creation
single-authored

How should a public retail currency and capital requirements be designed when intermediaries issue private money? Does this matter for asset-price volatility? I address these questions in a New Monetarist model in which an increase of interest rates boosts private-money supply: intermediaries write loan contracts with higher repayment obligations and thus intermediate more claims as private money. This transmission channel is at the core of my findings. When no public retail currency is issued, multiple steady states can arise, because private-money demand increases with interest rates as well. When public money is issued, it crowds in private money by stimulating competition in interest rates; when it pays a negative dividend, steady-state multiplicity arises as well. Optimal capital requirements balance the liquidity gains from private-money creation and the agency costs of loan supervision. They render private money scarce by curbing interest rates, exerting a multiplier effect. This conflicts with the Friedman rule. (Draft) 

Strategic Debt in a Monetary Economy
With Hugo van Buggenum (ETH Zurich)

We analyze in a New-Monetarist framework how producers improve their bargaining position vis-à-vis heterogeneous consumers by means of issuing debt. Corresponding with empirical evidence, producers negotiate better terms of trade when indebted. In general equilibrium, debt comes with inefficiencies due to a pecuniary externality—debt is too cheap. In absence of a Pigouvian tax, monetary policy improves welfare by deviating from the Friedman rule. Consumers then economize on money holdings, and producers issue less debt in response. Less debt makes trade with low-preference consumers more likely, so that trade accelerates and money is spent faster. (Draft)