Working papers

Smart Banks (with Alkis Georgiadis-Harris and Yuliyan Mitkov)

Since Diamond and Dybvig (1983), banks have been viewed as inherently fragile. We challenge this view in a general mechanism design framework, where we allow for flexibility in the design of banking mechanisms while maintaining limited commitment of the intermediary to future mechanisms. We find that the unique equilibrium outcome is efficient. Consequently, runs cannot occur in equilibrium. Our analysis points to the ultimate source of fragility: banks are fragile if they cannot collect and optimally respond to useful information during a run and not because they engage in maturity transformation. We link our banking mechanisms to recent technological advances surrounding 'smart contracts,' which enrich the practical possibilities for banking arrangements.

Blockchain Congestion Facilitates Currency Competition

Blockchain capacity constraints induce congestion when many users want to transact at the same time, challenging the usability of cryptocurrencies as money. This paper argues that blockchain capacity constraints lead to low inflation outcomes when cryptocurrencies compete for user demand. In equilibrium, a low-inflation coin must experience higher congestion, i.e. more transaction demand, than a high-inflation coin. Coin issuers then strategically undercut each other's money growth rates, limiting the overall inflation rate of the economy. However, the equilibrium is necessarily inefficient given unrealized gains from trade due to congestion and the cost of maintaining blockchain security.

Currency Competition with Firms

previously titled "Money Talks: Information and Seignorage"

This paper analyses the consequences for monetary policy if the central bank competes with private money issued by firms. I present a benchmark with a monopoly firm who issues money and optimally implements deflationary monetary policy to boost product sales. As a result, the central bank loses its policy autonomy. I extend the benchmark to analyze the optimal policy of a currency consortium which issues money accepted by other firms. Inflationary pressures arise as the private currency becomes more widely used.

Bank Resolution, Deposit Insurance, and Fragility (with Alkis Georgiadis-Harris)

Since the Great Financial Crisis, the share of insured and uninsured deposits in bank liabilities has increased substantially for large US banks---but not for smaller ones. We offer a theoretical explanation in the introduction of resolution powers, i.e. the ability to impose losses on bank shareholders and creditors. In such a world, banks issue deposits in order to channel resources towards uninsured depositors, imposing losses on insured depositors and forcing the government to conduct bailouts. Our model suggests that resolution and deposit insurance must be complemented by equity or long-term debt requirements.

Measuring Bail-in Credibility (with George Pennacchi)

We empirically investigate the credibility of bank recapitalization reforms using a structural model similar to Merton (1974, 1977). Bank liabilities are contingent claims on its assets so that bank equity and debt can be interpreted as options on asset values. In the data, credit spreads on bank debt are valued as the product of ‘no-bailout’ probabilities and expected loss rates in the absence of a bailout. We calculate the latter using equity and balance sheet data. The no-bailout probability is estimated by regressing credit default swaps (CDS) spreads on the model-implied no-bailout loss rates. Before the Lehman bankruptcy, we find significantly higher market-perceived bailout probabilities for US banks, particularly G-SIBs, relative to non-financial firms. Since the Great Financial Crisis, bailout probabilities have clearly declined, and no longer differ statistically significantly.

Bank Resolution and the Disciplining Effect of Demandable Debt (with Alkis Georgiadis-Harris)

In a model with asymmetric information on asset returns, banks issue demandable debt if the government's preferred resolution strategy takes the form of bail-ins. Creditors then respond to news on bank fundamentals and subsequent runs on loss-absorbing debt render bail-ins ineffective. Controlling the maturity structure of debt has two benefits. First, longer maturity debt disciplines markets ex-post while avoiding government bailouts. Second, ex-ante market discipline, measured by the average quality of projects, increases. The model provides an explanation why regulators impose minimum maturity requirements for bail-in debt and a motivation to treat short-term debt preferentially during intervention.

Work in progress

Platform Money: Competition for the Unit of Account

Teaching

Lecturer, University of Bonn, Digital Finance (MSc)

I designed a course on blockchain economics and digital money. Students learn about the economic limits of blockchains and develop an understanding of currency competition in models of money as medium of exchange.

Syllabus 2022 (unchanged in 2023),  Teaching Evaluations 2022, Teaching Evaluations 2023

Lecturer, University of Bonn, Seminar "Wissenschaftliches Arbeiten" (BSc)

Seminar that introduces principles of research to undergraduate students.

Teaching Fellow, LSE, Ec424  Monetary Economics and Aggregate Fluctuations (MSc)

Full-year course covering money’s roles as a medium of exchange and unit of account, monetary policy in the presence of nominal rigidities,  unconventional monetary policies, firm price setting behaviour, central bank communication, fiscal policy and financial crises. 

Teaching Evaluations (2017 - 2021)

Teaching Assistant, LSE, Ec210  Intermediate Macroeconomics (BSc)

Teaching Evaluations 16/17