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Working Paper
Counterfeiting as private money in mechanism design
We describe counterfeiting activity as the issuance of private money, one which is difficult to monitor. Our approach, which amends the basic random-matching model of money in mechanism design, allows a tractable welfare analysis of currency competition. We show that it is not efficient to eliminate counterfeiting activity completely. We do not appeal to lottery devices, and we argue that this is consistent with imperfect monitoring.
Working Paper
Information gathering by a principal
In the standard principal-agent model, the information structure is fixed. In this paper allow the principal to choose his level of informedness before he contracts with the agent. During the contracting phase, the agent never learns what the principal knows about the state of the world. I examine the cases where the agent observes and does not observe the level of informedness that the principal chooses. The strategic nature of the model environment implies that there are both direct and indirect costs associated with the existence of high quality information. The implications for ...
Working Paper
A model of (the threat of) counterfeiting
A simple matching-model of money with the potential for counterfeiting is constructed. In contrast to the existing literature, counterfeiting, if it occurred, would be accompanied by two distortions: costly production of counterfeits and harmful effects on trade. However, application of the Cho-Kreps refinement is shown to imply that there is no equilibrium with counterfeiting. If the cost of producing counterfeits is low enough, then there is no monetary equilibrium. Otherwise, there is a monetary equilibrium without counterfeiting.
Working Paper
Cash-in-the-Market Pricing in a Model with Money and Over-the-Counter Financial Markets
Entrepreneurs need cash to finance their real investments. Since cash is costly to hold, entrepreneurs will underinvest. If entrepreneurs can access financial markets prior to learning about an investment opportunity, they can sell some of their less liquid assets for cash and, as a result, invest at a higher level. When financial markets are over-the-counter, the price that the entrepreneur receives for the assets that he sells depends on the amount of liquidity (cash) that is in the OTC market: Greater levels of liquidity lead to higher asset prices. Since asset prices are linked to ...
Working Paper
Bank Panics and Scale Economies
A bank panic is an expectation-driven redemption event that results in a self-fulfilling prophecy of losses on demand deposits. From the standpoint of theory in the tradition of Diamond and Dybvig (1983) and Green and Lin (2003), it is surprisingly di cult to generate bank panic equilibria if one allows for a plausible degree of contractual flexibility. A common assumption employed in the standard banking model is that returns are linear in the scale of investment. Instead, we assume the existence of a fixed investment cost, so that a higher risk-adjusted rate of return is available only if ...
Working Paper
Shadow Bank Runs
Short-term debt is commonly used to fund illiquid assets. A conventional view asserts that such arrangements are run-prone in part because redemptions must be processed on a first-come, first-served basis. This sequential service protocol, however, appears absent in the wholesale banking sector---and yet, shadow banks appear vulnerable to runs. We explain how banking arrangements that fund fixed-cost operations using short-term debt can be run-prone even in the absence of sequential service. Interventions designed to eliminate run risk may or may not improve depositor welfare. We describe how ...
Working Paper
Private Takings
This paper examines the implications associated with a recent Supreme Court ruling, Kelo v. City of New London. Kelo can be interpreted as supporting eminent domain as a means of transferring property rights from one set of private agents ? landowners ? to another private agent ? a developer. Under voluntary exchange, where the developer sequentially acquires property rights from landowners via bargaining, a holdout problem arises. Eminent domain gives all of the bargaining power to the developer and, as a result, eliminates the holdout problem. This is the benefit of Kelo. However, ...
Working Paper
Shadow Bank Runs
Short-term debt is commonly used to fund illiquid assets. A conventional view asserts that such arrangements are run-prone in part because redemptions must be processed on a first-come, first-served basis. This sequential service protocol, however, appears absent in the wholesale banking sector—and yet, shadow banks appear vulnerable to runs. We explain how banking arrangements that fund fixed-cost operations using short-term debt can be run-prone even in the absence of sequential service. Interventions designed to eliminate run risk may or may not improve depositor welfare. We describe how ...
Working Paper
Summer workshop on money, banking, payments and finance: an overview
The 2010 Summer Workshop on Money, Banking, Payments and Finance met at the Federal Reserve Bank of Chicago this summer, for the second year. The following document summarizes and ties together the papers presented.
Report
Monetary Policy Implementation with an Ample Supply of Reserves
We offer a parsimonious model of the reserve demand to study the trade-offs associated with various monetary policy implementation frameworks. Our model considers a reserve demand function that encompasses banks' preferences for reserves in the post 2007-2009 financial crisis world and incorporates shocks to the demand for and the supply of reserves. We find that the best policy implementation outcomes are realized when reserves are somewhere in between scarce and abundant. This outcome is consistent with the Federal Open Market Committee's 2019 announcement to implement monetary policy in a ...