Published Papers
The Reversal Interest Rate (w/Brunnermeier and Koby, American Economic Review, 2023) The reversal interest rate is the rate at which accommodative monetary policy reverses and becomes contractionary for lending. We theoretically demonstrate its existence in a macroeconomic model featuring imperfectly competitive banks that face financial frictions. When interest rates are cut too low, further monetary stimulus cuts into banks’ profit margins, depressing their net worth and curtailing their credit supply. Similarly, when interest rates are low for too long, the persistent drag on bank profitability eventually outweighs banks’ initial capital gains, also stifling credit supply. We quantify the importance of this mechanism within a calibrated New Keynesian model. (Online Appendix) Token-Based Platform Governance (w/Brunnermeier, 2024, Journal of Financial Economics) We develop a model to compare the governance of traditional shareholder-owned platforms to that of platforms that issue tokens. A traditional shareholder governance structure leads a platform to extract rents from its users. A platform that issues tokens for its services can mitigate this rent extraction, as rent extraction lowers the platform owners’ token seigniorage revenues. However, this mitigation from issuing “service tokens” is effective only if the platform can commit itself not to dilute the “service token” subsequently. Issuing “hybrid tokens” that bundle claims on the platform's services and its profits enhances efficiency even absent ex-ante commitment power. Finally, giving users the right to vote on platform policies, by contrast, redistributes surplus but does not necessarily enhance efficiency. (WP version. Online Appendix) Working Papers
Monetary Policy with Inelastic Asset Markets (2023) I develop a New Keynesian model to study the transmission of both conventional and unconventional monetary policy through financial markets. The model's two key features are (i) heterogeneous financial intermediaries with downwards-sloping asset demand curves, and (ii) households that face frictions in reallocating their savings across intermediaries. The central bank directly controls the risk-free rate, whereas the risk premium is determined by the distribution of intermediaries’ wealth and the central bank’s purchases of risky assets. Interest rate hikes reduce long-term risky asset values, redistributing wealth away from risk-tolerant intermediaries and increasing the risk premium. Central bank asset purchases can initially stimulate investment by reducing the risk premium, but asset prices may undershoot when those purchases are unwound. Optimal policy simultaneously uses both interest rate cuts and asset purchases to stabilize asset prices during downturns. Blockchain Economics (with Brunnermeier, 2022) The fundamental problem in digital record-keeping is to establish consensus on an update to a ledger, e.g., a payment. Consensus must be achieved in the presence of faults—situations in which some computers are offline or fail to function appropriately. Traditional centralized record-keeping systems rely on trust in a single entity to achieve consensus. Blockchains decentralize record-keeping, dispensing with the need for trust in a single entity, but some instead build a consensus based on the wasteful expenditure of computational resources (proof-of-work). An ideal method of consensus would be tolerant to faults, avoid the waste of computational resources, and be capable of implementing all individually rational transfers of value among agents. We prove a Blockchain Trilemma: any method of consensus, be it centralized or decentralized, must give up (i) fault-tolerance, (ii) resource-efficiency, or (iii) full transferability. (Online Appendix) Opaque Intermediation and Credit Cycles (2021) I propose a theory of credit cycles driven by the private production of opaque, liquid assets (e.g., ABS or CLOs). Opacity enhances assets' liquidity, permitting greater issuance volumes, but prevents investors from determining when the underlying projects are of low quality. Strong macroeconomic fundamentals give rise to credit booms characterized by opaque asset origination and pervasive credit misallocation. As bad projects build up in the economy, investors begin to question the value of opaque assets and eventually refuse to finance them altogether, precipitating a collapse in liquidity and investment. The bust has a cleansing effect: opaque origination is abandoned, and investors no longer finance projects whose quality they cannot evaluate. I show that a policymaker would limit opaque intermediation during booms in order to moderate the subsequent bust by implementing transparency regulations and macroprudential policies. A Model of Collateralized Lending Chains (2021) Collateral is often used to secure promises among multiple parties in debt markets. I present a model in which agents with heterogeneous beliefs borrow by using a physical asset and the liabilities of other agents as collateral. In equilibrium, a chain of lending emerges: each agent lends to the next-most optimistic agent and borrows from the next-most pessimistic agent. This leads to a tranched payoff structure in which each agent takes losses only after their debtors are wiped out. Intermediation allows optimists to lever up while pessimists invest in safe assets. In extensions of the benchmark model, I examine the implications of this arrangement for financial stability. I show that (1) chains of lending lead to contagion in margin-driven crashes along the chain of lending and across asset classes, (2) leverage and private-label safe asset production comove positively, and (3) financial innovation leads both borrowers and intermediaries to take riskier positions. |