Browsing by Author "Chiu, Jonathan"

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The economics of cryptocurrencies – bitcoin and beyond
(Te Herenga Waka—Victoria University of Wellington, 2017) Chiu, Jonathan; Koeppl, Thorsten V
How well can a cryptocurrency serve as a means of payment? We study the optimal design of cryptocurrencies and assess quantitatively how well such currencies can support bilateral trade. The challenge for cryptocurrencies is to overcome double-spending by relying on competition to update the blockchain (costly mining) and by delaying settlement. We estimate that the current Bitcoin scheme generates a large welfare loss of 1.4% of consumption. This welfare loss can be lowered substantially to 0.08% by adopting an optimal design that reduces mining and relies exclusively on money growth rather than transaction fees to finance mining rewards. We also point out that cryptocurrencies can potentially challenge retail payment systems provided scaling limitations can be addressed.
Open Access
Innovation and growth with financial, and other, frictions
(Te Herenga Waka—Victoria University of Wellington, 2015) Chiu, Jonathan; Meh, Cesaire; Wright, Randall
The generation and implementation of ideas are crucial for economic performance. We study this in a model of endogenous growth, where productivity increases with innovation, and where the exchange of ideas (technology transfer) allows those with comparative advantage implement them. Search, bargaining, and commitment frictions impede the idea market, however, reducing efficiency and growth. We characterize optimal policies involving subsidies to innovative and entrepreneurial activity, given both knowledge and search externalities. The role of liquidity is discussed. We show intermediation helps by financing more transactions with fewer assets, and, more subtly, by ameliorating holdup problems. We also discuss some evidence.
Open Access
On the essentiality of E-money
(Te Herenga Waka—Victoria University of Wellington, 2016) Chiu, Jonathan; Wong, Tsz-Nga
Recent years have witnessed the advances of e-money systems such as Bitcoin, PayPal and various forms of stored-value cards. This paper adopts a mechanism design approach to identify some essential features of different payment systems that implement the optimal resource allocation. We find that, compared to cash, e-money technologies allowing limited participation, limited transferability and non-zero-sum transfers can help mitigate fundamental frictions and enhance social welfare, if they satisfy conditions in terms of parameters such as trade frequency and bargaining powers. An optimally designed e-money system exhibits realistic arrangements including non-linear pricing, cross-subsidization and positive interchange fees even when the technologies incur no costs. Regulations such as a cap on interchange fees (à la the Dodd-Frank Act) can distort the optimal mechanism and reduce welfare.
Open Access
Relationships in the interbank market
(Te Herenga Waka—Victoria University of Wellington, 2016) Chiu, Jonathan; Monnet, Cyril
The market for central bank reserves is mainly over-the-counter and exhibits a core-periphery network structure. This paper develops a model of relationship lending in the unsecured interbank market. In equilibrium, a tiered lending network arises endogenously as banks choose to build relationships in order to insure against liquidity shocks and to economize on the cost to trade in the interbank market. Relationships matter for banks’ bidding strategies at the central bank auction, and introduce a relationship premium that can significantly distort the observed overnight rate. For example, it can explain some anomalies in the level of interest rates – namely, the fact that banks sometimes trade above (resp. below) the central bank’s lending (resp. deposit) rate. The model also helps understand how monetary policy affects the network structure of the interbank market and its functioning, and how the market responds dynamically to an exit from the floor system. We also use the model to discuss the potential effects of bilateral exposure limit on relationship lending.
Open Access
Trading dynamics with adverse selection and search: Market freeze, intervention and recovery
(Te Herenga Waka—Victoria University of Wellington, 2016) Chiu, Jonathan; Koeppl, Thorsten V
We study trading dynamics in an asset market where the quality of assets is private information and finding a counterparty takes time. When trading ceases in equilibrium as a response to an adverse shock to asset quality, a government can resurrect trading by buying up lemons which involves a financial loss. The optimal policy is centred around an announcement effect where trading starts already before the intervention for two reasons. First, delaying the intervention allows selling pressure to build up thereby improving the average quality of assets for sale. Second, intervening at a higher price increases the return from buying an asset of unknown quality. It is optimal to intervene immediately at the lowest price when the market is sufficiently important. For less important markets, when the shock to quality and search frictions are small, it is optimal to rely on the announcement effect. Here delaying the intervention and fostering the effect by intervening at the highest price tend to be complements.