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Discussion Paper
Bitcoin Is Not a New Type of Money
Bitcoin, and more generally, cryptocurrencies, are often described as a new type of money. In this post, we argue that this is a misconception. Bitcoin may be money, but it is not a new type of money. To see what is truly new about Bitcoin, it is useful to make a distinction between “money,” the asset that is being exchanged, and the “exchange mechanism,” that is, the method or process through which the asset is transferred. Doing so reveals that monies with properties similar to Bitcoin have existed for centuries. However, the ability to make electronic exchanges without a trusted ...
Report
Money, credit, monetary policy, and the business cycle in the euro area: what has changed since the crisis?
This paper studies the relationship between the business cycle and financial intermediation in the euro area. We establish stylized facts and study their stability during the global financial crisis and the European sovereign debt crisis. Long-term interest rates have been exceptionally high and long-term loans and deposits exceptionally low since the Lehman collapse. Instead, short-term interest rates and short-term loans and deposits did not show abnormal dynamics in the course of the financial and sovereign debt crisis.
Report
Payment networks in a search model of money
In a simple search model of money, we study a special kind of memory that gives rise to an arrangement resembling a payment network. Specifically, we assume that agents can pay a cost to access a central database that tracks payments made and received. Incentives must be provided to agents to access the central database and to produce when they participate in this arrangement. We also study policies that can loosen these incentive constraints. In particular, we show that a "no-surcharge" rule has good incentive properties. Finally, we compare our model with that of Cavalcanti and Wallace.
Working Paper
Rehypothecation and Liquidity
We develop a dynamic general equilibrium monetary model where a shortage of collateral and incomplete markets motivate the formation of credit relationships and the rehypothecation of assets. Rehypothecation improves resource allocation because it permits liquidity to flow where it is most needed. The liquidity benefits associated with rehypothecation are shown to be more important in high-inflation (high interest rate) regimes. Regulations restricting the practice are shown to have very different consequences depending on how they are designed. Assigning collateral to segregated accounts, as ...
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.
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 ...
Report
Bitcoin as money?
The spectacular rise late last year in the price of Bitcoin, the dominant virtual currency, has attracted much public attention as well as scholarly interest. This policy brief discusses how some features of Bitcoin, as designed and executed to date, have hampered its ability to perform the functions required of a fiat money??as a medium of exchange, unit of account, and store of value. Furthermore, we document how various forms of intermediaries have emerged and evolved within the Bitcoin network, particularly noting the convergence toward concentrated processing, both on and off the ...
Report
U. S. consumer cash use, 2012 and 2015: an introduction to the Diary of Consumer Payment Choice
U.S. consumer cash payments averaged 26 percent of all U.S. consumer payments by number (volume share) from 2008 to 2015, according to the Survey of Consumer Payment Choice (SCPC), and were essentially unchanged between 2012 and 2015. New estimates from the Diary of Consumer Payment Choice (DCPC) show that the volume share of consumer cash payments is higher than estimated in the SCPC and suggest that the cash volume share was 8 percentage points lower in 2015 than in 2012. The DCPC most likely does not provide an accurate estimate of the actual change in the cash volume share, however, due ...
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
Beyond the Doomsday Economics of “Proof-of-Work” in Cryptocurrencies
This paper discusses the economics of how Bitcoin achieves data immutability, and thus payment finality, via costly computations, i.e., ?proof-of-work.? Further, it explores what the future might hold for cryptocurrencies modelled on this type of consensus algorithm. The conclusions are, first, that Bitcoin counterfeiting via ?double-spending? attacks is inherently profitable, making payment finality based on proof-of-work extremely expensive. Second, the transaction market cannot generate an adequate level of ?mining? income via fees as users free-ride on the fees of other transactions in a ...