Working Papers

Easy Money: the Inefficient Supply of Inside Liquidity

Latest Version: September 2023 

In modern market economies, money supply increasingly depends on liquid debt securities, such as deposits and commercial paper, created by financial intermediaries. However, the recent financial crisis has exposed the fragility of this source of liquidity. This paper outlines a model in which currency, safe liabilities, and risky liabilities all provide liquidity services. It shows that, by setting the inflation rate, the central bank introduces a wedge in consumption. Moreover, inflation determines the level of liquid assets, but its composition is left to the market. During normal times, intermediaries provide ample amounts of liquidity, while during a crisis there is a large drop in the liquidity supply because of defaults of risky securities. This equilibrium is inefficient because of a pecuniary externality, and optimal policy aims to reduce the supply of risky securities. Liquidity requirements and investment mandates fail to achieve the social optimum because they redistribute assets without curbing the issuance of risky securities. Nevertheless, there is an optimal inflation policy that addresses the inefficiency.

Bank Tax and Deposit Competition: Evidence from U.S. State Taxes

with X. Liu and G. Pan, Revise and Resubmit at JFQA, draft available upon request  

We use a novel dataset on bank-specific state income taxes in the United States to study how local bank tax shocks affect regional deposit markets. We find that banks lower deposit rates to pass on state tax burdens to depositors, especially in low-competition markets. Higher taxes also reduce competition permanently by deterring new entries. Tax incidence on depositors persists with weaker competition but does not spill over to bank branches in other states or non-taxable intermediaries within the state. Our model shows how banks pass through tax to depositors and how tax-induced competition changes magnify tax effects.

The Cost of Being Green: How ESG Ratings Affect a Firm’s Cost of Equity
with F. O'Donnell and R. Segara 

Latest Version: September 2023 

Media coverage: Columbia Law School Blue Sky Blog 

This paper examines the impact of ESG ratings on a firm's cost of equity (COE) and challenges the assumption that higher ESG ratings always lead to a reduction in equity costs. While previous research suggests that firms can benefit from improved ESG ratings, recent evidence raises doubts about the assumed advantages. We investigate this relationship over an 18-year period (2004 to 2022) using comprehensive data from the United States. We find that a one standard deviation increase in ESG ratings is linked to a significant 15 basis points increase in a firm's COE on average. This relationship is predominantly observed among S&P 500 firms or large firms, while its impact is less pronounced for energy-intensive firms. These findings highlight the importance of considering industry-specific dynamics, firm-level characteristics, and the broader investment climate when assessing the impact of ESG ratings on a firm's COE. 

Work in Progress

Has Greener Become Less Costly? Evidence From U.S. Firms’ Cost of Equity
with R. Segara