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Working Paper
A Tractable Model of Monetary Exchange with Ex-Post Heterogeneity
We construct a continuous-time, New-Monetarist economy with general preferences that displays an endogenous, non-degenerate distribution of money holdings. Properties of equilibria are obtained analytically and equilibria are solved in closed form in a variety of cases. We study policy as incentive-compatible transfers financed with money creation. Lump-sum transfers are welfare-enhancing when labor productivity is low, but regressive transfers achieve higher welfare when labor productivity is high. We introduce illiquid government bonds and draw implications for the existence of ...
Briefing
Should the Fed Issue Digital Currency?
The United States might benefit from eventually replacing most physical cash with central bank digital currency (CBCD), but first the Federal Reserve must resolve several key policy and implementation issues, such as establishing comparative advantage over private issuers and ensuring safety and soundness.
Briefing
Why Stablecoins Fail: An Economist’s Post-Mortem on Terra
Why do some stablecoins, such as Terra's UST, fail but others do not? Was Terra just an unlucky victim of a classic bank run or speculative attack? Or was its high-yield deposit offering doomed to fail like a Ponzi scheme? What is the limit of the stablecoin's algorithm? What makes payment stable? In this article, we'll dive into potential answers to these questions about the failed stablecoin.
Working Paper
Leveraging the Disagreement on Climate Change: Theory and Evidence
We theoretically and empirically investigate how climate risks affect collateralized debt markets. First, we develop a debt model where agents have different beliefs over a long-run risk. In contrast with existing two-period competitive-equilibrium models, our infinite-horizon competitive-search model predicts more pessimistic agents are more likely to make leveraged investments on risky collateral assets. They also tend to use longer maturity debt contracts, which are more exposed to the long-run risk. Second, employing large data on real estate and mortgage transactions, combined with high ...
Briefing
What Is SWIFT, and Could Sanctions Impact the U.S. Dollar's Dominance?
The recent removal of Russian banks from the SWIFT messaging system has highlighted the importance of payments in supporting economies. But the weaponization of SWIFT has also left some commentators worrying about the loss of the U.S. dollar's dominance, as it might drive banks and firms to other substitutes. This Economic Brief discusses the economics of SWIFT and explains why emigrating from the U.S. dollar may be more difficult than we thought.
Briefing
Can China Avoid a Liquidity-Trap Recession? Some Unintended Consequences of Macroprudential Policies
A liquidity trap is a nightmare for central banks because the zero lower bound constrains them from further reducing the nominal interest rate to stimulate the economy. The nightmare can be long: For example, Japan — formerly the world's second-largest economy after the U.S. — has been battling its liquidity trap since its real-estate bubble burst in 1990. Recently, some commentators have argued that a liquidity trap is imminent in China — currently the world's second-largest economy — pointing to signs such as deposit surge (despite declining interest rates), mounting deflationary ...
Working Paper
Payments on Digital Platforms: Resiliency, Interoperability and Welfare
Digital platforms, such as Alibaba and Amazon, operate an online marketplace to facilitate transactions. This paper studies a platform’s business model choice between accepting cash and issuing tokens, as well as the implications for welfare, resiliency, and interoperability. A cash platform free rides on the existing payment infrastructure and profits from collecting transaction fees. A token platform earns seigniorage, albeit bearing the costs of setting up the system and holding reserves to mitigate the cyber risk. Tokens earn consumers a return, insulating transactions from the ...
Briefing
The Borrower of Last Resort: What Explains the Rise of ON RRP Facility Usage?
This article explains why the Fed has been borrowing more than $1.4 trillion from its borrower-of-last-resort facility: the Overnight Reverse Repo. We compare the roles of five channels potentially driving Fed borrowing (such as saving glut, quantitative easing, regulation, etc.) and find that one channel — the Treasury General Account drawdown — is associated with most of the current usage. We also find this channel's impact could be partially moderated if the Fed tapers quantitative easing accordingly.
Journal Article
Self-Insurance and the Risk-Sharing Role of Money
Overcoming the lack of coincidence of wants is a well-acknowledged role of money. In this review, I illustrate that the use of money also promotes risk-sharing in the society: when individuals hold money, it helps other individuals mitigate their own liquidity risks.