Financial markets

Amit Chaudhary, Ganesh Viswanath-Natraj, 13 May 2022

On 10 May 2022, the price of TerraUSD, an algorithmic stablecoin operating on the Terra blockchain, fell and it lost its peg to one US dollar. Using the devaluation of the TerraUSD peg as a case study, this column shows how algorithmic stablecoins are vulnerable to speculative attacks when the system is under-collateralised. The authors point to solutions – stable collateral and over-collateralisation – to stabilise the peg.

Chenzi Xu, He Yang, 03 May 2022

Innovations in private money creation, such as stablecoins, can be economically useful because they improve efficiency in the payments system. However, if these currencies are not fully ‘stable’, uncertainty over their value may be a source of transactions friction that have real costs. The column discusses how the National Banking Act of 1864 in the US provides a natural experiment for evaluating the effects of stabilising the value of private money. The act introduced a new type of private money that was fully stable for the first time. Gaining access to the stable money generated growth in economic sectors that were sensitive to transaction costs. 

Ming Deng, Markus Leippold, Alexander Wagner, Qian Wang, 21 April 2022

Is the geopolitical crisis due to the Russian invasion of Ukraine likely to accelerate or retard the transition to a low-carbon economy? This column argues that stock prices reactions offer a preview of the future economic impact of the Russia-Ukraine war. These reactions suggest that the speed of transition to a low-carbon economy appears to be diverging between the US and Europe. These results obtain while controlling for ESG measures, inflation exposure, and international exposure of firms.

Levent Altinoglu, Joseph Stiglitz, 18 April 2022

The interconnected structure of the financial system has been a focal point of debate among policymakers in the wake of recent financial crises. This column offers a theory to help explain the structure of the financial system and its consequences for risk-taking and systemic risk. The authors find that interconnectedness and excessive risk-taking reinforce one another and the anticipation of ex-post government intervention may exacerbate the systemic risk. The theory, in turn, has important implications for the design of macroprudential regulation. 

Fabio Braggion, Felix von Meyerinck, Nic Schaub, 15 April 2022

Inflation has resurfaced following the COVID-19 pandemic and the war in Ukraine, leading to a lively discussion on how individual investors could protect the real value of their financial wealth against rising prices. This column uses a unique dataset to provide empirical evidence that individual investors in Germany in the 1920s bought less (sold more) stocks when facing higher local inflation. The effect was more pronounced for less sophisticated investors. The authors also find a positive relationship between local inflation and forgone returns following stock sales. These findings point to individual investors suffering from money illusion. 

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