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.

Measuring Bail-in Credibility, with George Pennacchi

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.

Renegotiation, Commitment, and Bank Resolution, with Alkis Georgiadis-Harris

draft coming soon

A bank seeks to finance a risky asset of unknown quality by posting contracts to a market of investors. After financing but before maturity, information about the quality of the asset is publicly revealed. Parties cannot commit not to renegotiate the existing contracts, and the returns of the asset depend in part on costly actions borne by the ultimate equity holders. To this set-up we add a regulator who cares about welfare, and who can intervene by injecting costly public funds (bail-outs), and by coercively altering the private contractual arrangements. We interpret the last policy as a ‘bail-in.’

The distinctive feature of our environment is the lack of commitment by all parties. We derive necessary and sufficient conditions for when demandable-debt contracts arise. In those cases, the bank benefits from fragilities and endogenously generates inefficient liquidation, which prevents the regulator from conducting bail-ins. Consequently, even when bail-ins are available the regulator is incapable to commit not to bail-out.

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

Bailouts, Bail-ins and Bagehot: New Principles for the Lender of Last Resort

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 2021/22

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