Research
Most Recent Research
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 enforceability of credit contracts matters for the welfare effect of private-money creation and the transmission of long-run inflation. We do so in 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. Commitment is not feasible under weak enforcement, leading to an inflation-driven increase in borrowing that 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 in the weak-enforcement calibration, private-money creation impairs 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.
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.