Research

Working papers

Tracing the learning curve: On cryptocurrency prices, volatility, and eventual adoption

Rapid growth of cryptocurrency prices has polarised opinions about their fundamental value. This paper's model uses standard financial theory to replicate this trend. In the model, a cryptocurrency's price includes a discount for uncertainty about the extent of eventual adoption. However, investors gradually learn about eventual adoption by observing noisy signals. Each signal represents emerging information about the cryptocurrency's development and the economy's reactions to it. As signals accumulate, the perceived uncertainty reduces, and the discount diminishes. Moreover, with more information, further signals have less price impact, reducing variance over time, which is also consistent with observation. The model offers an intuitive explanation of why the high risk of cryptocurrency investment has been rewarded. New information leads to revisions to estimates of eventual adoption, which may raise or lower the price (risk). However, the new information also reduces the uncertainty discount, which always raises the price (reward).

Explaining the link between government bond liquidity yields and exchange rates

When a country’s government bond liquidity yield falls relative to another country, its currency tends to depreciate against that country. Using a two-country dynamic equilibrium model, I explore the causal mechanisms behind this link. The model includes a liquidity constraint requiring that a portion of investment be financed by selling government bonds. An adverse shock to the saleable portion of one country’s bond forces substitution between investment types, thus skewing their mix. That country responds to the reduced efficiency by investing less and running a trade surplus, causing the exchange rate to depreciate. Concurrently, given the bond’s reduced liquidity, its liquidity yield reduces. The reduction is slightly offset by scarcer liquidity overall. In keeping with the link’s observed ubiquity among country pairs, the model does not rely on any special role for US assets.

House prices, capital flows, and international cooperation in macroprudential policy

Following the great recession of 2008, macroprudential policy has gained in popularity. However, given financial integration, can macroprudential policy succeed without international cooperation? This paper studies borrower based macroprudential policy in a two-country model, in the context of the “global saving glut” of the early 2000s. Germany and Spain are used as a case study. Optimal, internationally cooperative policy is compared to a Nash equilibrium between national optimising policymakers, and to a status quo of no macroprudential policy response. Policy regimes are ranked according to the ex-ante expected welfare they generate. As expected, non-cooperation is inferior to cooperation at the global level. However, due to certain competitive policymaker behaviour, non-cooperation is also inferior to no policy response. The result holds under some alternative calibrations and not others. The policy implication is that, in a global saving glut, international cooperation can ensure that macroprudential efforts do not backfire.