Research

Publications

Know Your (Holding) Limits: CBDC, Financial Stability and Central Bank Reliance, ECB Occasional Paper No. 326, 2023, with Barbara Meller

How do central bank digital currencies (CBDC) impact the balance sheets of banks and central banks? To tackle this question empirically, we built a constraint optimisation model that allows for individual banks to choose how to respond to outflows of deposits, based on cost considerations and subject to the availability of reserves and collateral, within the individual banks and system wide, and for a given level of liquidity risk tolerance. We simulate the impact of a fictitious digital euro introduction in the third quarter of 2021, using data from over 2,000 euro area banks. 

Presented at the the Dutch Central Bank, the European Central Bank (by co-author) and the 12th International Conference of the Financial Engineering and Banking Society (by co-author)


Central bank digital currency and bank intermediation, ECB Occasional Paper No. 293, 2022, with R. Adalid, A.  Álvarez-Blázquez, K. Assenmacher, L. Burlon, M. Dimou, C. López-Quiles, N. Martín Fuentes, B. Meller, P. Radulova, C. Rodriguez d’Acri, T.  Shakir, G. Šílová, O. Soons, A. Ventula

In view of the significant degree of uncertainty surrounding the design of a potential digital euro, its demand and the prevailing environment in which it would be introduced, this paper explores a set of analytical exercises that can offer insights into the consequences it could have for bank intermediation in the euro area.

SUERF Policy Note, Issue No 281 "CBDC and Bank Intermediation in the Euro Area", June 14th 2022

Central Banking Article, Issue No 149 "CBDC and bank intermediation in the eurozone", June 14th 2022

Presented at the European Central Bank, the European Commission, Deloitte Madrid, SUERF Webinar


Published Working papers

Public money as a store of value, heterogeneous beliefs, and banks: Implications of CBDC, ECB Working Paper No. 2801, 2023 ,with Manuel A. Muñoz

Abstract: According to the evidence, the bulk of euro-denominated cash is held for store of value purposes, with such holdings sharply increasing in times of high economic uncertainty. We develop a Diamond and Dybvig model with public money as a store of value and heterogeneous prior beliefs about the probability of a bank run that accounts for this evidence. The issuance of a central bank digital currency (CBDC) as a store of value that is technologically superior to cash introduces a trade-off. On the one hand, the efficiency of holding public money increases and those consumers who were already holding public money benefit by fully replacing cash with CBDC. On the other hand, CBDC leads to bank disintermediation as it lowers the subjective probability of a bank run above which consumers prefer to hold public money rather than bank deposits. While CBDC partially replaces deposits, long-term lending decreases less than proportionally to deposits as remaining depositors are, on average, more optimistic about bank stability and, consequently, banks optimally re-balance their portfolio. The authority can determine the magnitude of such effects by calibrating CBDC design features such as remuneration and quantity limits ex ante.

VoxEU column "Central bank digital currency and heterogeneous beliefs about bank stability: The role of public money as a store of value"

Presented at the University of Amsterdam, the Dutch Central Bank, the European Central Bank, the Bank of England, the Eurosystem Research Network on Cash (by co-author), Oxford Financial Intermediation Theory Conference (by co-author) and the EEA-ESEM Congress 2023 (by co-author)


The Euro as a Diverse Monetary Union, with Enrico Perotti

Abstract: We analyze causes and consequences of a monetary unification among countries with different institutional quality. Countries with stronger institutions choose a more productive policy, resulting in a stronger currency and lower taxes. Governments under weaker institutions prefer more spending and may require devaluation to ensure fiscal solvency. Creating a diverse monetary union (DMU) leads to rapid market adjustments while nominal wages lag and institutional differences persist. A credible DMU tend to involve hidden re- and devaluations with redistributive effects across countries. Productive and fiscal capacity improve in stronger countries while public spending in weaker countries is less constrained just as their fiscal capacity is reduced by the revaluation. Firms and employment gain in stronger countries, along with savers in weaker countries. In bad times a stable DMU requires a credible internal fiscal transfer, balancing the initial shift in fiscal capacity. A weak country government may agree to join a DMU as it enables more public spending, even though its productive capacity suffers.

VoxEU column "The euro: A transfer union from the start"

SUERF Policy Note, Issue No 149 "A diverse monetary union creates invisible transfers that justify conditional solidarity"

CEPR discussion paper

Presented at the CEPR Conference: The Politics of Regulation and Central Banking, the European Stability Mechanism, the University of Amsterdam, the Tinbergen Institute, the Dutch central bank, the 2020 EEA annual congress, the EDEEM Doctoral Workshop 2019


The Safety Demand and Common Fiscal Policy in a Monetary Union

Abstract: There is evidence for a strong demand for safety, both steady and inelastic. A sudden loss of safe assets played a key role in the Great financial crisis and the European sovereign debt crisis, while the Covid-19 pandemic required unprecedented public support programs to avoid a further collapse in consumption. I analyze a two-country model of a monetary union with a well-defined safety demand. I show that governments provide a lower amount of public safety compared to a constrained social planner and households rely too much on private sector safe assets. The reason is that when a government chooses spending, it only considers the resulting safety benefits and taxation costs to domestic households. However, public spending also comes with a positive externality for foreign savers as it increases the total supply of public safety in the monetary union. I show that some degree of a common fiscal policy can lead to a Pareto improvement by compensating for the lower-than-optimal national provision of public safety. This result does not rely on actual fiscal transfers, and it also applies when some member states may default.

Presented at the University of Amsterdam, the 16th Macro Finance Society Workshop, Warwick Economics PhD Conference 2020, the KVS new paper session 2020, the Nederlandse Economenweek 2020 and the AFA 2021 Annual Meeting Ph.D. Poster Session, the Tinbergen Institute.


Non-refereed publications

Perotti, E. and Soons, O., (2022) "Structurele verschillen tussen lidstaten vereisen meer gezamenlijk beleid", ESB, 107(4812) --- (PDF)

Koutny et al., (2022) "How to Unlock the European Investment Bank’s Potential: four reforms", FEPS policy study

Co-authored with Christian Koutny, Johannes G. v. Luckner, and Neil Warner 

Soons, O., (2020) "Structurele divergentie binnen eurogebied blijft bestaan", ESB, 105(4781) --- (PDF) 

News coverage: Het Financieel Dagblad --- BNR Radio interview


Other Research Activities