Papers
Cryptocurrencies in Emerging Markets: a Stablecoin Solution? (with D. Murakami) [October 2021]
Abstract
El Salvador’s 2021 monetary experiment to make Bitcoin legal tender increases financial inclusion at the cost of a volatile medium of exchange. In this paper we study the macroeconomic effects of introducing Bitcoin in a workhorse small open economy model. The model’s baseline calibration predicts a 1 standard deviation decline in Bitcoin prices will cause a peak decline in output and consumption of approximately 1 percent. We study a potential solution to El Salvador’s experiment, which is to replace Bitcoin with stablecoins pegged to the USD and backed by dollar reserves. We model a net positive welfare benefit relative to financial autarky for the unbanked population when using stablecoins, but net welfare costs with using a high volatility currency like Bitcoin.
Decentralized Stablecoins and Collateral Risk (with R. Kozhan) [October 2021]
Abstract
In this paper, we study the mechanisms that govern price stability of MakerDAO’s DAI token, the first decentralised stablecoin. Operating on the Ethereum blockchain, DAI works through a set of autonomous smart contracts, in which users deposit cryptocurrency collateral, typically Ethereum, and borrow a fraction of their positions as DAI tokens. Through a model, we show the equilibrium price covaries negatively with returns to risky collateral, and peg-price volatility is related to collateral risk. We find evidence for our model predictions using data on the universe of collateralized debt positions. Returns between DAI and Ethereum covary negatively, with sharp correlations in states where collateral crashes. The introduction of safe collateral types has led to an increase in peg stability.
Decentralized Stablecoins and Governance, in preparation for the 2021 Tokenomics Conference proceedings (with R. Kozhan) [October 2021]
Abstract
We study the fundamentals governing the price of the MakerDAO governance token MKR.
Governance tokens are minted in response to liquidations, and burned in response to
growth in the system surplus. MKR tokens appreciate with an increase in system surplus
and depreciate with a rise in systemic risk due to DAI liquidation spirals. We discuss
incentive compatibility conditions that need to be satisfied for the protocol to maintain
the DAI stablecoin peg.
The Information Content of Trump Tweets and the Currency Market (with I. Filippou, A. Gozluklu and M. Nguyen) [October 2021]
Abstract
Using textual analysis, we identify the set of Trump tweets that contain information on
macroeconomic policy, trade or exchange rate content. We then analyse the effects
of Trump tweets on the intraday trading activity of foreign exchange markets, such
as trading volume, volatility and FX spot returns. We find that Trump tweets reduce
speculative trading, with a corresponding decline in trading volume and volatility, and
induce a bias reflecting Trump’s (optimistic) views on the U.S. economy. We rationalise
these results within a model of Trump tweets revealing economic content as a public
signal that reduces disagreement among speculators.
What Keeps Stablecoins Stable? (with R. Lyons) [May 2021]
Abstract
Using a rich dataset of trades between the stablecoin Treasury and private investors, we examine how arbitrage stabilizes the price of the dominant stablecoin, Tether. We identify the arbitrage mechanism through a unique natural experiment: the migration of Tether from the Omni to the Ethereum blockchain in 2019. This event led to an increase in investor access to arbitrage trades with the Tether Treasury, and reduced the absolute size of peg deviations by more than half. We also pin down the sources of stablecoin instability: Premiums are due to stablecoins’ role as a safe haven; discounts derive from collateral concerns.
Price-Setting in the Foreign Exchange Swap Market: Evidence from Order Flow (with O. Syrstad) [April 2021]
Abstract
This paper investigates price discovery in foreign exchange (FX) swaps. Using data on inter-dealer transactions, we find a 1 standard deviation increase in order flow (i.e. net pressure to obtain USD through FX swaps) increases the cost of dollar funding by up to 4 basis points after the 2008 crisis. This is explained by increased dispersion in dollar funding costs and quarter-end periods. We find central bank swap lines reduced the order flow to obtain USD through FX swaps, subsequently affecting the forward rate. In contrast, during quarter-ends and monetary announcements we observe high frequency adjustment of the forward rate.
Unconventional Monetary Policy and Covered Interest Rate Parity Deviations: is there a Link? [September 2020]
Abstract
This paper explores the persistence of covered interest rate parity (CIP) deviations. Since 2008, these deviations have implied a dollar financing premium for banks in the Euro area, Japan and Switzerland. Using a model, we explore two unconventional monetary policies: quantitative easing and negative rates. Both policies lead to increase in excess demand for dollars in the forex swap market. To absorb this excess, financially constrained dealers increase the dollar premium. We find empirical support for widening of CIP deviations around unconventional monetary announcements, and rising share of forex swap funding in response to a decline in domestic credit spreads.
Work in Progress
“International Monetary Policy Spillovers: A High Frequency Approach” (with C. Jauregui).
“Commodity Currency Excess Returns, Disaster Risk and Recursive Preferences” (with D. Murakami and R. Nguyen)
