Pub Date : 2022-11-01DOI: 10.1146/annurev-financial-031721-081537
A. Lo, Richard T. Thakor
We review the recent literature on financing biomedical innovation, with a specific focus on the drug development process and how it may be enhanced to improve outcomes. We begin by laying out stylized facts about the structure of the drug development process and its associated costs and risks, and we present evidence that the rate of discovery for life-saving treatments has declined over time while costs have increased. We make the argument that these structural features require drug development (i.e., biopharmaceutical) firms to rely on external financing and at the same time amplify market frictions that may hinder the ability of these firms to obtain financing, especially for treatments that may have large societal value relative to the benefits going to the firms and their investors. We then provide an overview of the evidence for various types of market frictions to which these drug development firms are exposed and discuss how these frictions affect their incentive to invest in the development of new drugs, leading to underinvestment in valuable treatments. In light of this evidence, numerous studies have proposed ways to overcome this funding gap, including the use of financial innovation. We discuss the potential of these approaches to improve outcomes.
{"title":"Financing Biomedical Innovation","authors":"A. Lo, Richard T. Thakor","doi":"10.1146/annurev-financial-031721-081537","DOIUrl":"https://doi.org/10.1146/annurev-financial-031721-081537","url":null,"abstract":"We review the recent literature on financing biomedical innovation, with a specific focus on the drug development process and how it may be enhanced to improve outcomes. We begin by laying out stylized facts about the structure of the drug development process and its associated costs and risks, and we present evidence that the rate of discovery for life-saving treatments has declined over time while costs have increased. We make the argument that these structural features require drug development (i.e., biopharmaceutical) firms to rely on external financing and at the same time amplify market frictions that may hinder the ability of these firms to obtain financing, especially for treatments that may have large societal value relative to the benefits going to the firms and their investors. We then provide an overview of the evidence for various types of market frictions to which these drug development firms are exposed and discuss how these frictions affect their incentive to invest in the development of new drugs, leading to underinvestment in valuable treatments. In light of this evidence, numerous studies have proposed ways to overcome this funding gap, including the use of financial innovation. We discuss the potential of these approaches to improve outcomes.","PeriodicalId":47162,"journal":{"name":"Annual Review of Financial Economics","volume":" ","pages":""},"PeriodicalIF":3.2,"publicationDate":"2022-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"48880648","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2022-09-02DOI: 10.1146/annurev-financial-111620-010537
Grace X. Hu, Jiang Wang
The fast growth of China's economy has brought it not only to the center of the global economy but also to a transition point in its growth model, a transition from scale to efficiency, speed to sustainability, input driven to innovation led. How its financial markets can drive this new growth model and facilitate the transition are pressing challenges, for China and for the world. We provide a comprehensive review of China's financial markets, including government bonds, corporate/credit bonds, stocks, asset-backed securities, financial derivatives, investment management, and currency, focusing on their growth paths, distinct characteristics, and unique opportunities. Despite fast expansion at times, their development is often lagging behind market needs, uneven over time, and unbalanced across markets. This developmental pattern is driven mostly by the government's immediate policy objectives rather than by the markets' ultimate efficiency in serving their key functions, including liquidity provision, price discovery, and risk allocation. Expected final online publication date for the Annual Review of Financial Economics, Volume 13 is November 2022. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.
{"title":"A Review of China's Financial Markets","authors":"Grace X. Hu, Jiang Wang","doi":"10.1146/annurev-financial-111620-010537","DOIUrl":"https://doi.org/10.1146/annurev-financial-111620-010537","url":null,"abstract":"The fast growth of China's economy has brought it not only to the center of the global economy but also to a transition point in its growth model, a transition from scale to efficiency, speed to sustainability, input driven to innovation led. How its financial markets can drive this new growth model and facilitate the transition are pressing challenges, for China and for the world. We provide a comprehensive review of China's financial markets, including government bonds, corporate/credit bonds, stocks, asset-backed securities, financial derivatives, investment management, and currency, focusing on their growth paths, distinct characteristics, and unique opportunities. Despite fast expansion at times, their development is often lagging behind market needs, uneven over time, and unbalanced across markets. This developmental pattern is driven mostly by the government's immediate policy objectives rather than by the markets' ultimate efficiency in serving their key functions, including liquidity provision, price discovery, and risk allocation. Expected final online publication date for the Annual Review of Financial Economics, Volume 13 is November 2022. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.","PeriodicalId":47162,"journal":{"name":"Annual Review of Financial Economics","volume":" ","pages":""},"PeriodicalIF":3.2,"publicationDate":"2022-09-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42040272","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2022-08-17DOI: 10.1146/annurev-financial-111620-025204
You Suk Kim, Karen Pence, Richard Stanton, J. Waldén, N. Wallace
This article reviews the dramatic growth of nonbank mortgage lending after the Global Financial Crisis, especially to borrowers with lower credit scores, and the related importance of mortgage-backed securitization. Our literature review suggests that the existing theoretical and empirical work on securitization is more relevant to bank than to nonbank lenders, thus leaving outstanding questions as to why nonbank market shares have increased to their current levels and how best to structure nonbank oversight. To highlight key differences in the mortgage-lending incentives of banks and nonbanks, we build a simple theoretical model of bank versus nonbank mortgage lending and use it to generate and test empirical hypotheses. We find, in particular, that loans issued by nonbanks are more likely to prepay early than loans issued by banks, the difference not explainable by nonbank borrowers prepaying more rationally. Using regulatory filings from nonbanks that are typically unavailable to academic researchers, we examine the balance sheets and liquidity and capital positions of large Ginnie Mae nonbank servicers, which face and pose more risk in the current mortgage system. We find that on average these servicers have reasonable liquidity and capital positions relative to standard regulatory thresholds, particularly in 2022:Q1 after a few quarters of elevated profits. However, some large Ginnie Mae servicers appear to have inadequate capital, as gauged by risk-based capital measures. If defaults rise on a large scale, the liquidity and capital positions of these servicers may amplify the disruption in the mortgage and housing markets. Expected final online publication date for the Annual Review of Financial Economics, Volume 13 is November 2022. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.
{"title":"Nonbanks and Mortgage Securitization","authors":"You Suk Kim, Karen Pence, Richard Stanton, J. Waldén, N. Wallace","doi":"10.1146/annurev-financial-111620-025204","DOIUrl":"https://doi.org/10.1146/annurev-financial-111620-025204","url":null,"abstract":"This article reviews the dramatic growth of nonbank mortgage lending after the Global Financial Crisis, especially to borrowers with lower credit scores, and the related importance of mortgage-backed securitization. Our literature review suggests that the existing theoretical and empirical work on securitization is more relevant to bank than to nonbank lenders, thus leaving outstanding questions as to why nonbank market shares have increased to their current levels and how best to structure nonbank oversight. To highlight key differences in the mortgage-lending incentives of banks and nonbanks, we build a simple theoretical model of bank versus nonbank mortgage lending and use it to generate and test empirical hypotheses. We find, in particular, that loans issued by nonbanks are more likely to prepay early than loans issued by banks, the difference not explainable by nonbank borrowers prepaying more rationally. Using regulatory filings from nonbanks that are typically unavailable to academic researchers, we examine the balance sheets and liquidity and capital positions of large Ginnie Mae nonbank servicers, which face and pose more risk in the current mortgage system. We find that on average these servicers have reasonable liquidity and capital positions relative to standard regulatory thresholds, particularly in 2022:Q1 after a few quarters of elevated profits. However, some large Ginnie Mae servicers appear to have inadequate capital, as gauged by risk-based capital measures. If defaults rise on a large scale, the liquidity and capital positions of these servicers may amplify the disruption in the mortgage and housing markets. Expected final online publication date for the Annual Review of Financial Economics, Volume 13 is November 2022. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.","PeriodicalId":47162,"journal":{"name":"Annual Review of Financial Economics","volume":" ","pages":""},"PeriodicalIF":3.2,"publicationDate":"2022-08-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"47614481","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2022-08-16DOI: 10.1146/annurev-financial-052021-072939
Shai Bernstein
In this article, I review the theoretical and empirical literature on the effects of public and private equity markets on firm behavior, emphasizing the consequences that emerge from disclosure requirements, ownership concentration, and degree of firm standardization. While publicly listed firms benefit from a lower cost of capital, enabling increased focus on commercialization and profitability, they are less suited to pursue long-term risky investments. Privately held firms are better equipped to pursue innovative projects but face a higher cost of capital, which limits their growth. Complementarities between public and private equity markets can mitigate their respective limitations. Innovation in private equity markets supplements commercialization efforts of public firms, and demand for innovation by public firms accelerates entrepreneurial activity in private equity markets. I conclude by discussing directions for future research. Expected final online publication date for the Annual Review of Financial Economics, Volume 13 is November 2022. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.
{"title":"The Effects of Public and Private Equity Markets on Firm Behavior","authors":"Shai Bernstein","doi":"10.1146/annurev-financial-052021-072939","DOIUrl":"https://doi.org/10.1146/annurev-financial-052021-072939","url":null,"abstract":"In this article, I review the theoretical and empirical literature on the effects of public and private equity markets on firm behavior, emphasizing the consequences that emerge from disclosure requirements, ownership concentration, and degree of firm standardization. While publicly listed firms benefit from a lower cost of capital, enabling increased focus on commercialization and profitability, they are less suited to pursue long-term risky investments. Privately held firms are better equipped to pursue innovative projects but face a higher cost of capital, which limits their growth. Complementarities between public and private equity markets can mitigate their respective limitations. Innovation in private equity markets supplements commercialization efforts of public firms, and demand for innovation by public firms accelerates entrepreneurial activity in private equity markets. I conclude by discussing directions for future research. Expected final online publication date for the Annual Review of Financial Economics, Volume 13 is November 2022. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.","PeriodicalId":47162,"journal":{"name":"Annual Review of Financial Economics","volume":" ","pages":""},"PeriodicalIF":3.2,"publicationDate":"2022-08-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42905661","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2022-08-12DOI: 10.1146/annurev-financial-101221-103806
Michelle Hanlon, Shane Heitzman
We provide updates to and perspectives on the enduring topic of debt and taxes. The recent decade brought us new empirical strategies, accounting rules, and tax laws. We discuss how these and other developments change our understanding of leverage and taxes. Overall, tax incentives still do not seem to have a consistent, first-order effect on corporate capital structure. This presents a puzzle as governments increasingly limit interest deductibility, citing its contribution to overleverage and distress. We discuss critical empirical challenges such as measurement, highlight issues surrounding assumptions about tax rates and real-world financing decisions, and offer insights and direction for future research. We conclude that rather than asking if taxes are a first-order driver of corporate capital structure, a more productive goal is a greater understanding of when tax incentives yield material effects on corporate capital structure. Expected final online publication date for the Annual Review of Financial Economics, Volume 13 is November 2022. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.
{"title":"Corporate Debt and Taxes","authors":"Michelle Hanlon, Shane Heitzman","doi":"10.1146/annurev-financial-101221-103806","DOIUrl":"https://doi.org/10.1146/annurev-financial-101221-103806","url":null,"abstract":"We provide updates to and perspectives on the enduring topic of debt and taxes. The recent decade brought us new empirical strategies, accounting rules, and tax laws. We discuss how these and other developments change our understanding of leverage and taxes. Overall, tax incentives still do not seem to have a consistent, first-order effect on corporate capital structure. This presents a puzzle as governments increasingly limit interest deductibility, citing its contribution to overleverage and distress. We discuss critical empirical challenges such as measurement, highlight issues surrounding assumptions about tax rates and real-world financing decisions, and offer insights and direction for future research. We conclude that rather than asking if taxes are a first-order driver of corporate capital structure, a more productive goal is a greater understanding of when tax incentives yield material effects on corporate capital structure. Expected final online publication date for the Annual Review of Financial Economics, Volume 13 is November 2022. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.","PeriodicalId":47162,"journal":{"name":"Annual Review of Financial Economics","volume":" ","pages":""},"PeriodicalIF":3.2,"publicationDate":"2022-08-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"49653762","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2022-08-08DOI: 10.1146/annurev-financial-111620-113307
E. Engel, R. Fischer, Alexander Galetovic
Public-private partnerships (PPPs) have emerged as an organizational form to provide public infrastructure. A key characteristic of PPPs is that private investors participate directly in individual infrastructure projects. The advantage of private finance is that it may improve incentives. However, private finance typically neither frees public funds nor enlarges the pool of viable projects. Private finance improves risk allocation if exogenous demand risk is assigned to the public, while endogenous risks are assigned to the private parties (PPPs and financiers), which provides strong incentives for efficiency. When funding for the project relies on user fees, variable term contracts can allocate risks efficiently, in contrast to allocation under fixed term contracts. The exploration of alternative financial contracts that allocate endogenous risks to private parties and determination of the optimal allocation of these risks among borrowers and lenders are potentially fruitful areas for future research. This line of research is probably relevant beyond infrastructure finance. Expected final online publication date for the Annual Review of Financial Economics, Volume 13 is November 2022. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.
{"title":"Private Finance of Public Infrastructure","authors":"E. Engel, R. Fischer, Alexander Galetovic","doi":"10.1146/annurev-financial-111620-113307","DOIUrl":"https://doi.org/10.1146/annurev-financial-111620-113307","url":null,"abstract":"Public-private partnerships (PPPs) have emerged as an organizational form to provide public infrastructure. A key characteristic of PPPs is that private investors participate directly in individual infrastructure projects. The advantage of private finance is that it may improve incentives. However, private finance typically neither frees public funds nor enlarges the pool of viable projects. Private finance improves risk allocation if exogenous demand risk is assigned to the public, while endogenous risks are assigned to the private parties (PPPs and financiers), which provides strong incentives for efficiency. When funding for the project relies on user fees, variable term contracts can allocate risks efficiently, in contrast to allocation under fixed term contracts. The exploration of alternative financial contracts that allocate endogenous risks to private parties and determination of the optimal allocation of these risks among borrowers and lenders are potentially fruitful areas for future research. This line of research is probably relevant beyond infrastructure finance. Expected final online publication date for the Annual Review of Financial Economics, Volume 13 is November 2022. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.","PeriodicalId":47162,"journal":{"name":"Annual Review of Financial Economics","volume":" ","pages":""},"PeriodicalIF":3.2,"publicationDate":"2022-08-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"45909908","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2022-08-08DOI: 10.1146/annurev-financial-111620-014802
Malcolm Baker, Daniel Bergstresser, George Serafeim, Jeffrey Wurgler
We review the pricing and ownership of green bonds, whose proceeds are used for environmentally focused purposes. After presenting an overview of the literature on green securities and green bonds in particular, we summarize the US corporate and municipal green bond markets. Green municipal bonds provide the best opportunity for detailed empirical study of how pricing and ownership differ from those of ordinary bonds. Green bonds are issued at a small premium of several basis points over similar ordinary bonds except when they are issued simultaneously with ordinary bonds from the same issuer; in that situation, a premium emerges over time on the secondary market. Green bonds, especially small or nearly riskless ones, are also more closely held than ordinary bonds. These facts are consistent with a simple framework that incorporates assets with nonpecuniary utility. Expected final online publication date for the Annual Review of Financial Economics, Volume 13 is November 2022. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.
{"title":"The Pricing and Ownership of US Green Bonds","authors":"Malcolm Baker, Daniel Bergstresser, George Serafeim, Jeffrey Wurgler","doi":"10.1146/annurev-financial-111620-014802","DOIUrl":"https://doi.org/10.1146/annurev-financial-111620-014802","url":null,"abstract":"We review the pricing and ownership of green bonds, whose proceeds are used for environmentally focused purposes. After presenting an overview of the literature on green securities and green bonds in particular, we summarize the US corporate and municipal green bond markets. Green municipal bonds provide the best opportunity for detailed empirical study of how pricing and ownership differ from those of ordinary bonds. Green bonds are issued at a small premium of several basis points over similar ordinary bonds except when they are issued simultaneously with ordinary bonds from the same issuer; in that situation, a premium emerges over time on the secondary market. Green bonds, especially small or nearly riskless ones, are also more closely held than ordinary bonds. These facts are consistent with a simple framework that incorporates assets with nonpecuniary utility. Expected final online publication date for the Annual Review of Financial Economics, Volume 13 is November 2022. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.","PeriodicalId":47162,"journal":{"name":"Annual Review of Financial Economics","volume":"1 1","pages":""},"PeriodicalIF":3.2,"publicationDate":"2022-08-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"63962097","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2022-07-29DOI: 10.1146/annurev-financial-012820-034126
Parit Sripakdeevong, R. Townsend
An all-or-nothing view of financial access leading to overly simplistic policy recommendations has been largely overturned in the data. Heterogeneity and explicit obstacles to trade are key aspects that need to be incorporated into models when looking at intermediate outcomes in the data. Networks in particular can amplify or work against policy interventions and do so in different directions for different groups at the same time. Work on village money markets allows us to better understand how these networks function, and how and why they can change with policy interventions. Nevertheless, though village economies are as sophisticated as those in New York financial markets, both suffer from familiar problems. One is reliance on relationships that segment markets and limit more universal benefits. A second problem is market contagion. Policy interventions facilitating financial access and the functioning of markets need to be guided by this stricter yet more realistic view. Expected final online publication date for the Annual Review of Financial Economics, Volume 13 is November 2022. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.
{"title":"The Village Money Market Revealed: Financial Access and Credit Chain Links Between Formal and Informal Sectors","authors":"Parit Sripakdeevong, R. Townsend","doi":"10.1146/annurev-financial-012820-034126","DOIUrl":"https://doi.org/10.1146/annurev-financial-012820-034126","url":null,"abstract":"An all-or-nothing view of financial access leading to overly simplistic policy recommendations has been largely overturned in the data. Heterogeneity and explicit obstacles to trade are key aspects that need to be incorporated into models when looking at intermediate outcomes in the data. Networks in particular can amplify or work against policy interventions and do so in different directions for different groups at the same time. Work on village money markets allows us to better understand how these networks function, and how and why they can change with policy interventions. Nevertheless, though village economies are as sophisticated as those in New York financial markets, both suffer from familiar problems. One is reliance on relationships that segment markets and limit more universal benefits. A second problem is market contagion. Policy interventions facilitating financial access and the functioning of markets need to be guided by this stricter yet more realistic view. Expected final online publication date for the Annual Review of Financial Economics, Volume 13 is November 2022. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.","PeriodicalId":47162,"journal":{"name":"Annual Review of Financial Economics","volume":" ","pages":""},"PeriodicalIF":3.2,"publicationDate":"2022-07-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"46386239","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2022-05-04DOI: 10.1146/annurev-financial-111620-022146
Saleem Bahaj, R. Reis
Liquidity lines between central banks are a key part of the international financial safety net. In this review article, we lay out some of the economic questions that they pose. Research has provided answers to some of these questions, but many more require further research. Expected final online publication date for the Annual Review of Financial Economics, Volume 13 is November 2022. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.
{"title":"The Economics of Liquidity Lines Between Central Banks","authors":"Saleem Bahaj, R. Reis","doi":"10.1146/annurev-financial-111620-022146","DOIUrl":"https://doi.org/10.1146/annurev-financial-111620-022146","url":null,"abstract":"Liquidity lines between central banks are a key part of the international financial safety net. In this review article, we lay out some of the economic questions that they pose. Research has provided answers to some of these questions, but many more require further research. Expected final online publication date for the Annual Review of Financial Economics, Volume 13 is November 2022. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.","PeriodicalId":47162,"journal":{"name":"Annual Review of Financial Economics","volume":" ","pages":""},"PeriodicalIF":3.2,"publicationDate":"2022-05-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"48744486","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2022-04-28DOI: 10.1146/annurev-financial-111621-101151
Christian Catalini,Alonso de Gortari,Nihar Shah
Stablecoins have the potential to drastically increase competition and innovation in financial services by reducing our reliance on traditional intermediaries. But they also introduce new challenges, as regulators rely on intermediaries to ensure financial stability, market integrity, and consumer protection. Because they operate at the interface between traditional banking and cryptocurrencies, stablecoins also represent an ideal setting for understanding the key trade-offs cryptocurrencies involve, and insights from robust stablecoin design and regulation are highly relevant for related innovations in decentralized finance (DeFi), nonfungible tokens, and Web3 protocols. In this review, we describe the following: key stablecoin design choices, from reserve composition to stability mechanism; legal claim against the issuer; noninterference with macroeconomic stability; and interoperability with public sector payment rails and central bank digital currencies. Last, we cover the key benefits of stablecoins in the context of real-time, low-cost programmable payments, financial inclusion, and DeFi. Expected final online publication date for the Annual Review of Financial Economics, Volume 13 is November 2022. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.
{"title":"Some Simple Economics of Stablecoins","authors":"Christian Catalini,Alonso de Gortari,Nihar Shah","doi":"10.1146/annurev-financial-111621-101151","DOIUrl":"https://doi.org/10.1146/annurev-financial-111621-101151","url":null,"abstract":"Stablecoins have the potential to drastically increase competition and innovation in financial services by reducing our reliance on traditional intermediaries. But they also introduce new challenges, as regulators rely on intermediaries to ensure financial stability, market integrity, and consumer protection. Because they operate at the interface between traditional banking and cryptocurrencies, stablecoins also represent an ideal setting for understanding the key trade-offs cryptocurrencies involve, and insights from robust stablecoin design and regulation are highly relevant for related innovations in decentralized finance (DeFi), nonfungible tokens, and Web3 protocols. In this review, we describe the following: key stablecoin design choices, from reserve composition to stability mechanism; legal claim against the issuer; noninterference with macroeconomic stability; and interoperability with public sector payment rails and central bank digital currencies. Last, we cover the key benefits of stablecoins in the context of real-time, low-cost programmable payments, financial inclusion, and DeFi. Expected final online publication date for the Annual Review of Financial Economics, Volume 13 is November 2022. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.","PeriodicalId":47162,"journal":{"name":"Annual Review of Financial Economics","volume":"229 1","pages":""},"PeriodicalIF":3.2,"publicationDate":"2022-04-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138542426","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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