with Fabienne Schneider
We study pseudonymity—an information regime where agents’ histories are perfectly observable, but linked only to pseudonyms rather than to true identities. A key feature is that agents may open and use multiple pseudonyms simultaneously. In a tractable environment with limited commitment, we characterize the set of stationary credit equilibria under pseudonymity, showing that it forms a strict non-empty subset of equilibria attainable under a no anonymity regime, where histories are publicly linked to true identities. Moreover, money is always essential under pseudonymity, yet cannot co-exist with credit. Finally, imposing optimal fees on pseudonym creation generally raises welfare, whereas making pseudonyms tradable never does.
The proposed revision of the Swiss Banking Act introduces a public liquidity backstop (PLB) for distressed systemically important banks (SIBs), in part to facilitate resolution. We examine the impact of the PLB on fiscal balances, societal welfare, and the incentives of bank shareholders and management. A PLB, like too-big-to-fail (TBTF) status, acts as a subsidy for non-convertible bonds, which can create negative externalities. Corrective measures must be implemented before the PLB is activated to align incentives with societal interests. We conservatively estimate that Swiss SIBs’ TBTF status results in funding cost reductions far greater than the proposed ex-ante compensation, with UBS Group AG alone gaining at least USD 2.9 billion in 2022. The risk for Switzerland of hosting SIBs warrants additional precautionary savings.
An intrinsically useless asset can have value not because it serves as a medium of exchange today, but because it could in the future--- this is the option value of money. We characterize the private and social option values of cryptocurrency in a model with a possibly self-interested government controlling the cash supply. The social value is ambiguous: negative because cryptocurrency raises the cost of holding cash, yet positive when it disciplines the government. Calibrating the model, we find households would forgo 0.10%-0.81% of consumption to live in an economy where Bitcoin carries option value.
How do heterogeneous inflation expectations affect the welfare costs of both average inflation and inflation volatility? And how does inflation itself shape the distribution of those expectations? I address these questions in a monetary model where expectation heterogeneity arises endogenously from households’ optimal information acquisition and idiosyncratic shopping in segmented markets, while firms are assumed to be better informed about future inflation. A central result is that, in the presence of heterogeneous expectations, inflation volatility allows firms to sustain higher markups, distorting consumption beyond the classic inflation tax and consumption risk. Quantitatively, the welfare cost of average inflation is 12–24%, while the cost of inflation volatility is 100 to 270 times larger than in a benchmark without heterogeneous expectations. Moreover, average inflation shapes the distribution of expectations both directly—through information acquisition—and indirectly—through its effect on the velocity of money and thus the speed of learning from shopping. Consistent with these mechanisms, I find supporting evidence in survey data.
Stablecoins and other private monies are increasingly used in payments. A common view holds that central banks need not worry, provided that private money is credibly pegged to public money and the central bank remains de facto independent. I show that the first condition can undermine the second. I study a monetary economy with public and private money in which a central bank without commitment cares about both its inflation target and avoiding sovereign default. Fiscal and monetary dominance arise endogenously and depend on the level of government debt. Regulation requiring stablecoin issuers to back their coins with “safe” government debt creates captive demand for that debt. This lets the government capture the liquidity premium on money indirectly through a convenience yield on government debt. It thereby has an incentive to issue more debt, which leads to more fiscal dominance. This has implications for the regulation of stablecoins (GENIUS Act, MiCA) and for CBDCs: according to the model, (a) mandating that stablecoins be backed by government debt may, perversely, make government debt, and hence stablecoins, less safe and erode central bank independence; (b) a CBDC that pays an attractive interest rate, however, can discipline the government even if barely used.
Money and credit are ubiquitous payment instruments in modern economies, yet co-essentiality—the feature that the use of money and credit outputferoms arrangments with only either- is hard to generate in microfounded models of money. We address this in a heterogeneous New-Monetarist framework where agents differ in expected lifespans. We show that when lifespans are publicly known, co-essentiality does not arise. However, introducing asymmetric information enables co-essentiality: credit becomes essential for young agents without money balances, while money provides a safeguard against default risks. Achieving such an equilibrium requires monetary policy to generate sufficient but limited inflation—high enough to raise debt limits but not so high as to excessively increase the cost of holding money.
How does monetary policy affect the emergence and size of pure bubbles---intrinsically worthless assets, such as cryptoassets, held only for their resale value---and how should it respond to them? I study these questions in an overlapping-generations model with capital, flexible prices, and a role for liquidity, in which the central bank sets both the interest rate and the size of its balance sheet.
In a benchmark economy with full-reserve banking, zero growth, and no wealth effects of monetary policy, bubbles emerge only under moderate liquidity frictions. Contrary to conventional wisdom, raising interest rates initially makes bubbles more likely and larger, but sufficiently high rates rule them out; larger central bank balance sheets also make bubbles more likely and larger. Yet bubbles help implement the optimal allocation and ease the central bank's task. I then extend the model to a growing economy, fractional-reserve banking with stablecoins, and wealth effects of monetary policy. Under certain conditions, central banks then want to limit their balance sheets to prevent bubbles, and stablecoins make bubbles less likely. Once wealth effects are sufficiently large, lower interest rates can instead fuel bubbles, in line with conventional wisdom.
This paper examines the relationship between inflation shocks and inflation uncertainty in Switzerland using a Bayesian GARCH-M-GJR-LEV framework. I test whether unexpected changes in inflation increase uncertainty, whether the effect differs between positive and negative shocks, and whether uncertainty feeds back into the level of inflation. Bayesian estimation reveals strong evidence that inflation shocks raise uncertainty, but little evidence that uncertainty affects inflation levels or that the effect is asymmetric. Out-of-sample forecasting exercises show that incorporating GARCH dynamics improves predictive accuracy for Swiss inflation, underscoring the practical value of modelling time-varying volatility even in a low-inflation, high-credibility environment.