Research

Working papers

Tracing the learning curve: On cryptocurrency prices, volatility, and eventual adoption
(Supplementary appendix)

Rapid cryptocurrency price growth has polarised opinion about their fundamental value. This paper rationalises prices by developing and fitting a theoretical model. In the model, a cryptocurrency's price depends on the extent of its eventual use. Since that is uncertain, the price includes a discount for risk. However, investors gradually learn about eventual use from noisy signals, each carrying information about the cryptocurrency's development and the economy's response. As signals accumulate, uncertainty falls and the discount shrinks, generating price growth. Unlike previously proposed frictions, decreasing-gain learning matches the observed decline in both mean and variance of returns, and fits many cryptocurrencies. 

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.