Working papers

Currency Competition with Firms

previously titled "Money Talks: Information and Seignorage",  submitted

This paper analyses the consequences for monetary policy if firms issue money which generates seignorage revenues and information on consumers. I present a benchmark economy with a unique monetary equilibrium in which firms do not accept other firms' currencies and optimally implement deflationary monetary policy. As a result, the central bank loses its policy autonomy. I extend the benchmark to show that currency consortia with decision powers and claims on seignorage concentrated in the hands of one firm induce inflationary pressures. Interest-bearing central bank digital currency reinstates policy autonomy and maximises welfare; reserve requirements induce commitment issues and reduce welfare.

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

submitted

Since the Great Financial Crisis, the share of deposits - both insured and uninsured - in bank liabilities has increased substantially. In this paper, we document this fact for the largest US banks. We show that it can be theoretically explained by 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 and Rhiannon Sowerbutts)

to be updated with Covid crisis data soon

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

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

draft coming soon, extended abstract

Since Diamond and Dybvig (1983) banks have been viewed as inherently fragile. We challenge this view in a general mechanism selection game, 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 just 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

draft coming soon

Blockchain capacity constraints lead to congestion, which is often criticized as a flaw of cryptocurrencies. This paper shows that blockchain congestion facilitates currency competition. Coins with lower inflation rates must experience a higher degree of congestion, implying a higher capacity utilization of the network. This feature gives rise to an undercutting logic in terms of money growth rates, reminiscent of Bertrand competition.

Teaching

Lecturer, University of Bonn, Digital Finance (MSc)

I designed a course on blockchain economics and digital currency competition. 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

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)

Teaching Evaluations (2017 - 2021)

Teaching Assistant, LSE, Ec210  Intermediate Macroeconomics (BSc)

Teaching Evaluations 16/17