Davide Porcellacchia

WITH K. SHEEDY | MARCH 2024

“The Macroeconomics of Liquidity in Financial Intermediation”

In financial crises, the premium on liquid assets such as US Treasuries increases alongside credit spreads. This paper explains the link between the liquidity premium and spreads. We present a theory of endogenous bank fragility arising from a coordination friction among bank creditors. The theory’s implications reduce to a single constraint on banks, which is embedded in a quantitative macroeconomic model to investigate the transmission of shocks to spreads and economic activity. Shocks that reduce bank net worth exacerbate the coordination friction. In response, banks lend less and demand more liquid assets. This drives up both credit spreads and the liquidity premium. By mitigating the coordination friction, expansions of public liquidity reduce spreads and boost the economy. Empirically, we identify high-frequency exogenous variation in liquidity by exploiting the time lag between auction and issuance of US Treasuries. We find a causal effect on spreads in line with the calibrated model.

WITH T. AHNERT, P. HOFFMANN & A. LEONELLO | DECEMBER 2023 | UNDER REVIEW

“Central Bank Digital Currency and Financial Stability”

What is the effect of Central Bank Digital Currency (CBDC) on financial stability? We answer this question by studying a model of financial intermediation with remunerated CBDC as consumers’ alternative to bank deposits and an endogenous risk of bank runs. Echoing widespread concerns, higher CBDC remuneration raises bank fragility by increasing consumers’ withdrawal incentives. On the other hand, it also induces banks to offer more attractive deposit contracts in order to retain funding, thereby reducing fragility. This results in a U-shaped relationship between bank fragility and CBDC remuneration. We evaluate policy proposals aimed at mitigating the financial-stability risks of CBDC, such as holding limits and contingent CBDC remuneration.

AUGUST 2023 | VOXEU | UNDER REVIEW

“The Tipping Point: Interest Rates and Financial Stability”

This paper studies the impact of interest rates on bank stability in a standard bank-run model. Banks invest in long-term assets, whose value decreases with interest rates, and set deposit rates to optimally insure depositors' liquidity risk. Liquidity-risk insurance implies banks earn interest margins, which increase with interest rates. Hence, interest rates have two countervailing effects: they reduce the value of banks' long-term assets while widening their margins. First, the paper characterizes the parametric condition under which an effect dominates. The condition implies interest-rate risk is captured by banks' maturity mismatch adjusted for deposits' effective duration. Second, the paper solves for the interest-rate level that tips banks into instability. Quantification points to the possibility of a negative effective maturity mismatch, making the tipping point a lower bound on interest rates.

WITH A. LEONELLO, C. MENDICINO & E. PANETTI | JUNE 2023 | R&R @ REVIEW OF FINANCE

“Savings, Efficiency and Bank Runs”

Does the level of deposits matter for bank fragility and efficiency? By augmenting a standard model of endogenous bank runs with a consumption-saving decision, we obtain two results. First, depositors' incentives to run are a function of savings held as bank deposits. Second, a saving externality emerges since individual depositors do not internalize the effect of their savings on the bank-run probability. Therefore, the economy features inefficient savings and bank liquidity provision, as well as excessive bank fragility. Finally, we characterize the optimal policy to implement the efficient allocation.

WITH T. AHNERT, K. ASSENMACHER, P. HOFFMANN, A. LEONELLO & C. MONNET | VOXEU | INTERNATIONAL JOURNAL OF CENTRAL BANKING (FORTHCOMING)

“The Economics of Central Bank Digital Currency”

This paper provides a structured overview of the burgeoning literature on the economics of CBDC. We document the economic forces that shape the rise of digital money and review motives for the issuance of CBDC. We then study the implications for the financial system and discuss of a number of policy issues and challenges. While the academic literature broadly echoes policy makers’ concerns about bank disintermediation and financial stability risks, it also provides conditions under which such adverse effects may not materialize. We also point to several knowledge gaps that merit further work, including data privacy and the study of end‐user preferences for attributes of digital payment methods.

WITH J. BRECKENFELDER, B. MAĆKOVIAK, D. MARQUÉS-IBÁÑEZ, C. OLOVSSON, A. POPOV & G. SCHEPENS | MARCH 2023

“The Climate and the Economy”

Climate change and the public policies to arrest it are and will continue reshaping the global economy. This Discussion Paper draws on economic research to identify some key medium- and long-run economic implications of these developments. It explores implications for growth, innovation, inflation, financial markets, fiscal policy, and severalsocio-economic outcomes. The main message that emerges is that climate change will cause income divergence across individuals, sectors, and regions, adjustment in energy markets, increased inflation variability, financial markets stress, intensified innovation, increased migration, and rising public debt. These challenges appear manageable for EU member states, especially under an early and orderly transition scenario. At the same time, the direction, scope, and speed of economic transformation is subject to large uncertainty due to twoseparate factors: the wide range of climate scenarios for a given trajectory of greenhouse gas emissions and the exact policy path governments choose, especially in the context of the ongoing Russian aggression in Ukraine.

FEBRUARY 2016

“Wage-Price Dynamics and Structural Reform in Japan”

Structural reforms in the liquidity trap need not be deflationary. This paper develops a simple framework to study the role that key characteristics of Japan’s labor and product markets—labor-market duality and weak corporate governance—play in generating unfavorable wage-price dynamics. The model allows a discussion of whether and in what form structural reforms may contribute to Japan’s short-run goal of reflating the economy. It finds that boosting inflation with structural reforms implies an unusual trade-off with employment, that is an inverted Phillips curve. Simultaneous implementation of labor-market and product-market reforms is most effective in terms of reflating the economy.