Research
Publications
Central bank digital currency and bank intermediation, ECB Occasional Paper 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
Working papers
Public money as a store of value, heterogeneous beliefs, and banks: Implications of CBDC, forthcoming in ECB working paper series, 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.
Presented at the University of Amsterdam, the Dutch Central Bank, the European Central Bank, the Bank of England
Finding the right balance with CBDC: Banks’ liquidity risk and central bank reliance, with Barbara Meller
Abstract: How would a central bank digital currency impact the balance sheets of the central bank and commercial banks? To tackle this question empirically, we propose a constraint optimisation model that allows individual banks to choose how to respond to deposit outflows, given bank-specific and system-wide reserve and collateral availability and assuming different liquidity risk preferences. We simulate the impact of a fictitious digital euro introduction in Q3-2021 using data from over 2000 euro area banks. The simulated impact depends on i) the amount of deposits that are withdraw and the speed at which this occurs, ii) the available liquidity in the banking system at the time of a potential digital euro introduction, iii) markets’ and supervisors’ liquidity risk preferences, iv) the bank’s business model, and v) the functioning of the interbank market. We illustrate that the impact on banks’ liquidity risk and funding structure, even in extremely pessimistic scenarios, would have been contained if a €3,000 digital euro holding limit per person had been in place.
Presented at the the Dutch Central Bank, the European Central Bank (by coauthor)
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": link
SUERF Policy Note, Issue No 149 "A diverse monetary union creates invisible transfers that justify conditional solidarity"
CEPR discussion paper: link
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
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
Discussant at the book panel on 'The Politics of Monetary Solidarity' by Dr. Waltraud Schelkle (2019), organized by the Amsterdam Centre for European Studies (ACES)