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"Geldtheorie"
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The volatility of Bitcoin and its role as a medium of exchange and a store of value
Bitcoin is designed as a peer-to-peer cash system. To work as a currency, it must be stable or be backed by a government. In this paper, we show that the volatility of Bitcoin prices is extreme and almost 10 times higher than the volatility of major exchange rates (US dollar against the euro and the yen). The excess volatility even adversely affects its potential role in portfolios. Our analysis implies that Bitcoin cannot function as a medium of exchange and has only limited use as a risk-diversifier. In contrast, we use the deflationary design of Bitcoin as a theoretical basis and demonstrate that Bitcoin displays store of value characteristics over long horizons.
Journal Article
The Science of Monetary Policy
This paper reevaluates the basic prescriptions of monetary policy design in the new Keynesian paradigm through the lens of imperfect knowledge. We show that while the basic logic of monetary policy design under rational expectations continues to obtain, perfect knowledge and learning can limit the set of policies available to central banks, rendering expectations management in general more difficult. Nonetheless, the desirability of some form of price-level targeting, inducing inertia in interest-rate policy, paramount under rational expectations, is robust to the assumption of imperfect knowledge.
Journal Article
Liquidity: A New Monetarist Perspective
This essay surveys the new monetarist approach to liquidity. Work in this literature strives for empirical and policy relevance, plus rigorous foundations. Questions include: What is liquidity? Is money essential in achieving desirable outcomes? Which objects can or should serve in this capacity? When can asset prices differ from fundamentals? What are the functions of commitment and collateral in credit markets? How does money interact with credit and intermediation? What can and should monetary policy do? The research summarized emphasizes the micro structure of frictional transactions, and studies how institutions like monetary exchange, credit arrangements, or intermediation facilitate the exchange process.
Journal Article
Optimal Monetary Policy with Informational Frictions
We study optimal policy in a business-cycle setting in which firms hold dispersed private information about, or are rationally inattentive to, the state of the economy. The informational friction is the source of both nominal and real rigidity. Because of the latter, the optimal monetary policy does not target price stability. Instead, it targets a negative relation between the nominal price level and real economic activity. Such leaning against the wind helps maximize production efficiency. An additional contribution is the adaptation of the primal approach of the Ramsey literature to a flexible form of informational friction.
Journal Article
Money Creation and the Shadow Banking System
It is widely argued that shadow banking grew rapidly before the recent financial crisis because of rising demand for \"money-like\" claims. This paper assesses a key premise of this argument: that investors actually treated short-term debt issued by shadow banks as a money-like claim. I present a model where the financial sector and the central bank jointly respond to demand for money-like claims. The model generates predictions about the prices and quantities of Treasury bills, central bank reserves, and shadow bank debt. These predictions are borne out in the data, suggesting investors did treat shadow bank debt as money-like.
Journal Article
Michelson-Morley, Fisher, and Occam: The Radical Implications of Stable Quiet Inflation at the Zero Bound
The long period of quiet inflation at near zero interest rates, with large quantitative easing, suggests that core monetary doctrines are wrong. It suggests that inflation can be stable and determinate at the zero bound, and by extension under passive policy including a nominal interest rate peg, and that arbitrary amounts of interest-paying reserves are not inflationary. Of the known alternatives, the New Keynesian model merged with the fiscal theory of the price level is the only simple economic model consistent with this interpretation of the facts.
I explore two implications of this conclusion. First, what happens if central banks raise interest rates? Inflation stability implies that higher nominal interest rates will eventually result in higher inflation. But can higher interest rates temporarily reduce inflation? Yes, but only by a novel mechanism that depends crucially on fiscal policy. Second, what are the implications for monetary policy and the urgency to “normalize”? Inflation stability implies that low interest rate monetary policy is, perhaps unintentionally, benign, producing a stable Friedman-optimal quantity of money, that a large interest paying balance sheet can be maintained indefinitely. The fiscal anchoring required by this interpretation of the data responds to discount rates, however, and may not be as strong as it appears.
Journal Article
Money, Banking, and Financial Markets
The fact that money, banking, and financial markets interact in important ways seems self-evident. The theoretical nature of this interaction, however, has not been fully explored. To this end, we integrate the Diamond (1997, Journal of Political Economy 105, 928–956) model of banking and financial markets with the Lagos and Wright (2005, Journal of Political Economy 113, 463–484) dynamic model of monetary exchange—a union that bears a framework in which fractional reserve banks emerge in equilibrium, where bank assets are funded with liabilities made demandable in government money, where the terms of bank deposit contracts are affected by the liquidity insurance available in financial markets, where banks are subject to runs, and where a central bank has a meaningful role to play, both in terms of inflation policy and as a lender of last resort. Among other things, the model provides a rationale for nominal deposit contracts combined with a central bank lender-of-last-resort facility to promote efficient liquidity insurance and a panic-free banking system.
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The Constitution and Nature of Money
I take the opportunity to elaborate and clarify the positioning theory of money in response to the critique of it provided by Geoffrey Ingham.
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