Research
Job-Market Paper
Strategic Debt in a Monetary Economy
With Hugo van Buggenum (ETH Zurich)
We analyze in a general-equilibrium framework how producers improve their bargaining position vis-à-vis consumers through debt. By indebting themselves, producers compel consumers to partially carry their debt burden. Customers who attach little value to producers' goods are not willing to do so, so that some bilateral matches fail to result in trade. Producers account for this extensive-margin channel, but only to the extent that it affects themselves; they ignore the negative effect on consumers. A Pigouvian tax on debt resolves this externality and, in its absence, monetary policy mitigates the externality by deviating from the Friedman rule. We calibrate the model to U.S. data and quantify optimal nominal interest rates at levels up to 0.5 percent. Although there is ample empirical evidence for the use of debt to leverage bargaining power, we show that there are better contracts to achieve this.
Working Papers
Credit Enforcement and Monetary-Policy Transmission
With Hugo van Buggenum (ETH Zurich) and Hans Gersbach (ETH Zurich)
We study how the degree of credit enforcement matters for the transmission of long-run inflation and the welfare effect of private-money creation. We do so in a model with directed and competitive search, where sellers borrow against their search-market income. Intermediaries sell the arising claims as private money to buyers, who use it along with fiat money to transact in the search market. Inflation stimulates borrowing by curbing real interest rates. With sophisticated enforcement, sellers borrow more through ex-ante commitment to more search, as this increases their search-market income. Trade therefore accelerates. With simple enforcement, commitment is not feasible. The inflation-driven increase in borrowing then decelerates trade since debt distorts search incentives ex post. We calibrate the economies with sophisticated and simple enforcement to U.S. data. The extent of private-money creation is close to optimal in the sophisticated-enforcement calibration, whereas in the simple-enforcement calibration, any level of private-money creation reduces welfare.
Working Paper, CEPR Discussion Paper
The Monetary Policy Haircut Rule
With Hans Gersbach (ETH Zurich)
We derive monetary-policy haircut rules by embedding a banking model into a two-sector neoclassical model. Banks rely on central-bank reserve loans that are collateralized according to the central bank’s collateral framework. We offer simple rules for optimal static and dynamic haircuts that balance the efficient allocation of capital across sectors and bank-default costs. We calibrate the model to the U.S. and find ranges for haircuts between 5 percent to 20 percent, considering numerical scenarios for capital-ownership shares, bank leverage, and productivity risk. Varying haircuts have also distributional effects: bondholders and workers may suffer from large haircuts, whilst bankers benefit despite reduced leverage.
Work in Progress
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.