All in, our model supports the idea that non-banks can increase market depth during normal times.
The cost of this improvement is both increased fragility for small investors during stress, and lower passthrough of central bank lending.
Whether welfare improves is a balance of these factors.
We show that the presence of non-bank dealers changes the relative passthrough of crisis interventions from the central bank. When non-banks act as dealers, the proportional impact of central bank lending is lower, and end investors receive a smaller proportional benefit from central bank lending.
In our model, non-bank dealers improve liquidity more during normal times than in stress, leading to a bifurcation of liquidity. Liquidity improves for large clients, who are served by multiple dealers. However, the cost is that banks may no longer provide reliable liquidity to marginal clients.
Bank dealers contend that continued competition from non-banks (like PTFs) will cause them to reduce their capital committed to market making. They argue that during times of stress, non-bank dealers will leave the market, increasing fragility. Our paper models this tension.
New Working Paper!
Non-Bank Dealing and Liquidity Bifurcation in Fixed-Income Markets” with Michael Brolley at WLU
papers.ssrn.com/sol3/papers....
We do some applied game theory on the role of dealers in bond markets.
#econsky
Financial economics starter pack - Part 2!
go.bsky.app/PPiR5qP
🚨Call for Papers🚨
Together with the Bank of Canada and the Chicago Fed, we're organizing a Conference on #FixedIncome Research and Implications for #MonetaryPolicy on May 22-23, 2025, in San Francisco. Submissions due by January 31. More details: www.frbsf.org/news-and-med...
#EconSky
Here's Bryan Caplan writing about math in economics.
Seems very wrong to me. I wonder what the quickest refutation is that would make sense to most practicing economists.
www.betonit.ai/p/economath_...
I made a starter pack of government economists.
go.bsky.app/K7fAcMi
The ability of central banks to restore financial market functioning during crises is well documented. However, these actions may come with costs.
Our goal was to review the literature, and provide an accessible summary on the costs and unintended consequences of central bank crises facilities.