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Essays in monetary economics and finance

Guennewig, Maximilian G. (2021) Essays in monetary economics and finance. PhD thesis, London School of Economics and Political Science.

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Identification Number: 10.21953/lse.00004339


This thesis examines monetary policy in the presence of digital currencies issued by firms, as well as the effectiveness and credibility of recent bank recapitalisation reforms. The first chapter discusses the consequences for monetary policy arising from currencies issued by firms—such as Facebook’s Libra—in order to generate seignorage revenues and information on consumers. The paper develops a benchmark with two important results. First, information shapes the degree of currency competition: firms do not accept their competitors’ currencies. Second, the central bank loses its policy autonomy. Profit-maximising firms implement a variant of the Friedman rule. As a result, public currency is unable to compete unless the central bank sets their nominal interest rate to zero, resulting in deflation. Importantly, private currency market power breaks this benchmark: inflationary pressures arise if firms form currency consortia, but decision powers and seignorage claims are concentrated in the hands of one firm. The second chapter (with Alkiviadis Georgiadis-Harris, LSE) evaluates the effectiveness and market disciplining effects of bail-ins. During a bail-in, the government mandates equity writedowns and debt-to-equity swaps with the goal of recapitalising failing banks. We develop a model of asymmetric information on asset returns in which banks issue debt in order to finance projects. In equilibrium, the maturity of bail-in debt shortens if the government intends to impose losses on bank creditors. Runs ensue in the anticipation of bail-ins, rendering such policies ineffective. Controlling the maturity structure of debt has two benefits. First, it allows the government to avoid bailouts. Second, long-term bail-in debt leads to an increase in market discipline. The model provides an explanation why regulators impose a minimum maturity of one year for bail-in debt, and a motivation to treat short-term debt preferentially during intervention. The third chapter (with George Pennacchi, University of Illinois) empirically investigates the credibility of bank recapitalization reforms using a structural model similar to Merton (1974, 1977). In the data, credit spreads on bank debt are valued as the product of market-perceived ‘no-bailout’ probabilities and expected no-bailout loss rates. Thus, no-bailout probabilities are estimated by regressing credit spreads on model-implied no-bailout loss rates. Before the Lehman bankruptcy, we find significantly higher bailout probabilities for US banks, relative to nonfinancial firms. Since then, relative bailout probabilities have clearly declined.

Item Type: Thesis (PhD)
Additional Information: © 2021 Maximilian G. Guennewig
Library of Congress subject classification: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Sets: Departments > Economics
Supervisor: Reis, Ricardo

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