Research
Research
Strategic Debt in a Monetary Economy
With Hugo van Buggenum (ETH Zurich)
Producers can leverage their bargaining power vis-à-vis consumers by entering bargaining with debt. We discover novel general-equilibrium effects of such strategic debt by developing a money-search framework featuring heterogeneous consumers. Debt distorts trade along two margins: it destroys matches with low-preference consumers and it tightens liquidity constraints within matches. While the fiscal authority can fully eliminate strategic debt through taxation, in its absence, monetary policy can partially curb it by deviating from the Friedman rule---raising nominal rates up until 0.51%. Finally, we show that producers can leverage their bargaining power even more effectively with contracts different from debt.
Credit Enforcement and Monetary-Policy Transmission
With Hugo van Buggenum (ETH Zurich) and Hans Gersbach (ETH Zurich)
We study how the enforceability of credit contracts matters for the welfare effect of private-money creation and the transmission of long-run inflation. For this purpose, we write a model of directed and competitive search where sellers borrow against their future search-market income. Intermediaries transform the arising claims into private money, which buyers use alongside fiat money for search-market transactions. Inflation stimulates borrowing by curbing real interest rates. Under strong enforcement, sellers can commit ex ante to more search to enhance their future income and thus their borrowing capacity; trade therefore accelerates. Under weak enforcement, commitment is not feasible, so that the inflation-driven increase in borrowing distorts ex-post search incentives and thus decelerates trade. We calibrate the strong- and weak-enforcement economies to U.S. data. The extent of private-money creation is close to optimal in the strong-enforcement calibration, whereas private-money creation impairs welfare in the weak-enforcement calibration.
Working Paper, CEPR Discussion Paper
The Monetary Policy Haircut Rule
With Hans Gersbach (ETH Zurich)
We present a rule for policy haircuts in discount-window lending, based on macro-financial fundamentals. In a dynamic two-sector economy, firms secure external financing through either bank loans or corporate bonds. Banks, in turn, depend on central-bank reserve loans, which they collateralize with bank loans and government bonds. The central bank imposes haircuts on this collateral, aiming to balance efficient capital allocation across sectors with bank-default costs. Calibrated to U.S. post-crisis data, our model identifies optimal bank-loan haircuts around 11%. Our haircut rule mitigates bank-equity shocks through a collateral stabilization channel. Contrary to conventional wisdom, bank-equity holders benefit from large haircuts.
Working Paper, CEPR Discussion Paper
How Public Money Crowds in Private Money
single-authored
I examine in a money-search model whether a public retail currency that perfectly competes with private money, e.g., a CBDC, would impair financial intermediation and financial stability. Intermediaries provide credit and create private money. Increasing real interest rates stimulate private-money supply since intermediaries write loan contracts with higher repayment obligations, so that balance sheets expand. Since private-money demand increases with interest rates as well, multiple steady states can arise when no public retail currency is issued. Once issued, it crowds in private money by boosting interest rates. When it pays a non-negative dividend, it also makes equilibrium multiplicity collapse. Optimal capital requirements render private money scarce by curbing interest rates—a multiplier effect. This conflicts with the Friedman rule.