Working Papers

What is the role of Bitcoin? In this paper I try to argue that the role of the Bitcoin network is to be a defense mechanism against transaction blocking by introducing a search and matching model with indivisible money. The model is enriched with security frictions due to a positive probability of transaction blocking. I study the optimal trading decisions between buyers and sellers under a fiat currency regime and under the assumption that trading happens with BTC tokens over the Bitcoin network. I show that if the honest miners in the Bitcoin network have higher marginal revenues from mining per unit of marginal cost than dishonest miners, the network remains secure. In this case, if the welfare cost of mining is lower than the welfare cost of not being able to transact in the fiat regime or if the total transaction volume is higher in the Bitcoin regime, then social welfare is more likely to be higher under the Bitcoin regime. If dishonest miners are in control, transactions between honest sellers and buyers are blocked. In this case the fiat currency regime can be better. Over the transition, social welfare depends on the parameter that controls for the speed of the money supply increase and it is not clear which of the two regimes is better. In addition, I show that if fixed costs are introduced then honest miners need a lower amount of total effort to secure the network. Finally, the first-best outcome can be achieved in the Bitcoin regime, even if the solution comes from a Nash bargaining, by optimally setting the transaction fees.

We develop a two-asset HANK model to examine the effects of various unconventional monetary policies, including Quantitative Easing, Operation Twist, and Liquidity Facilities. Our analysis focuses on the macro-financial implications of these policies, as well as their impact on wealth and income inequality through shifts in portfolio composition between liquid and illiquid assets. The model features a financial sector with mutual funds and banks that invest in short- and long-term bonds, reserves, and credit to firms. We find that Operation Twist has weaker effects compared to standard QE interventions, although all strategies are qualitatively similar in their impact on output, inflation, and the composition of liquid and illiquid assets.

This paper studies the spillover effects of US quantitative easing on emerging market economies. I estimate the spillover effects using Bayesian VAR models for the US economy and a set of emerging market economies. A 1\% increase in the Federal Reserve’s securities held outright has positive and statistically significant effects on real GDP, real Investment, the price level, and asset prices in the US economy. Emerging market economies experience positive statistically significant effects on real GDP, real investment, inflation, and stock market indices, along with currency appreciation, current account deterioration, and increase in their long-term bond yields. Then I build a two-country Heterogeneous-Agents New Keynesian model with QE shocks and dollarized bank balance sheets in the EME. The model is estimated to match the empirical movements. Bank balance sheets are at the heart of the international transmission mechanism. The choice between HANK vs. RANK matters for the magnitude of the impulse responses since without heterogeneity aggregate demand is lower in both countries. The model predicts that QE decreases inequality in the US economy in the medium run, but in the short run wealth inequality rises, whereas in the emerging market economy wealth inequality increases and remains elevated over time. Finally, policies aiming to reduce the flow of capital between countries, such as capital controls, have significant adverse effects on economic activity and welfare.

This paper studies the effects of fiscal policy on aggregate economic activity and inequality when the monetary authority follows conventional and unconventional policies. First, I build a three-agent Preferred Habitat New Keynesian (PHANK) model with a banking sector in which QE matters for the determination of output in the short run. I analytically derive the fiscal multiplier and show that it decreases in the presence of countercyclical QE policies, even at the zero lower bound. A calibration of the model for the US economy yields fiscal and QE multipliers close to 3 when the monetary authority pegs the short-term policy rate. The optimal fiscal and QE policies are expansionary at the ZLB. Second, I also consider a medium-scale HANK model to further study the distributional effects of fiscal expansions and recompute the fiscal multipliers under active fiscal policy, passive monetary policy and QE. In the enhanced model, the government spending multiplier at the ZLB is 1.041. Countercyclical QE after a fiscal expansion reduces consumption inequality in the medium run but increases wealth inequality. In the short-run those effects are reversed.

This paper studies the effects of unexpected changes in US monetary policy on digital asset returns. We use event study regressions and find that monetary policy surprises negatively affect the returns on BTC and ETH, the two largest digital assets. On the other hand, the effect on the returns on market indices are also negative, but marginally non-significant. Second, we use high-frequency price data to examine the effect of the FOMC statements release and Minutes release on the prices of the assets with the higher collateral usage on the Ethereum Blockchain Decentralized Finance (DeFi) ecosystem. The FOMC statement release strongly affects the volatility of digital asset returns, while the effect of the Minutes release is weaker. The volatility effect strengthened after December 2021, when the Federal Reserve changed its policy to fight inflation. We also show that some borrowing interest rates in the Ethereum DeFi ecosystem are affected positively by unexpected changes in monetary policy. In contrast, the debt outstanding and the total value locked are negatively affected. Finally, we utilize a local Ethereum Blockchain node to record the activity history of primary DeFi functions, such as depositing, borrowing, and liquidating, and study how these are influenced by the FOMC announcements over time.