Search Results
Working Paper
Artificial Intelligence and Technological Unemployment
How large are the effects of artificial intelligence (AI) on labor productivity and unemployment? We develop a labor-search model of technological unemployment where AI learns from workers, raises productivity, and displaces them if renegotiation fails. The model admits three steady states: no AI; some AI with limited capability, more job creation but higher unemployment; unbounded AI with endogenous growth and employment gains. Calibrated to U.S. data, the model implies a threefold productivity gain but a 23% employment loss, half within five years. Plausible parameters give rise to global ...
Working Paper
Lending Relationships and Optimal Monetary Policy
We construct and calibrate a monetary model of corporate finance with endogenous formation of lending relationships. The equilibrium features money demands by firms that depend on their access to credit and a pecking order of financing means. We describe the mechanism through which monetary policy affects the creation of relationships and firms' incentives to use internal or external finance. We study optimal monetary policy following an unanticipated destruction of relationships under different commitment assumptions. The Ramsey solution uses forward guidance to expedite creation of new ...
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.
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 ...
Briefing
Should Central Banks Worry About Facebook's Diem and Alibaba's Alipay?
Alibaba — an e-commerce platform in China similar to Amazon — has created its own payment system (Alipay) to provide currency-like services: facilitating transactions, supporting peer-to-peer transfers and paying interest. Platforms like Facebook and Amazon are also researching creating their own digital currencies, but so far they have relied primarily on existing payment methods. What drives platforms to develop their own digital currency rather than use existing cash and card options? And should central banks and financial regulators worry about platforms issuing their own currency?
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.
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.
Briefing
How Concentrated Is the Distribution of Banks' Reserve Balances?
Reserve balances play a critical role in the banking system. Prior to 2020, they satisfied reserve requirements, and they now also serve as the primary payment instrument for settling transactions and client orders via the Fedwire system. Maintaining adequate reserve balances allows banks to meet withdrawal demands and instills depositor confidence, reducing the risk of bank runs. Empirical studies have demonstrated that banks' holding of reserve balances affects the provision of bank credit to firms and households, although the relationship depends on types of credit and methods of reserves ...
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 ...
Working Paper
Contingent Debt and Performance Pricing in an Optimal Capital Structure Model with Financial Distress and Reorganization
Building on the trade-off between agency costs and monitoring costs, we develop a dynamic theory of optimal capital structure with financial distress and reorganization. Costly monitoring eliminates the agency friction and thus the risk of inefficient liquidation. Our key assumption is that monitoring cannot be applied instantaneously. Rather, transitions between agency and monitoring are subject to search frictions. In the optimal contract, the firm seeks a monitoring opportunity whenever it is financially distressed, i.e., when the risk of liquidation is high. If a monitoring opportunity ...