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Davide Porcellacchia

Research

Division

Monetary Policy Research

Current Position

Senior Economist

Fields of interest

Macroeconomics and Monetary Economics,Financial Economics

Email

Davide.Porcellacchia@ecb.europa.eu

Education
2013-2018

PhD in Economics, London School of Economics, London, UK

2011-2012

MSc in Economics, London School of Economics, London, UK

2008-2011

BSc in Economics and Management, Bocconi University, Milan, Italy

Professional experience
2015

Summer intern - International Monetary Fund

2013-2015

Consultant - J.C. Flowers and Co.

21 July 2020
WORKING PAPER SERIES - No. 2447
Details
Abstract
To study the effect on financial stability of persistent changes in the interest rate, this paper develops a recursive model of liquidity creation based on Diamond and Dybvig (1983). The model features two stable balanced growth paths: a good one with a healthy banking system and a bad one with a failed banking system. The paper’s main result is that a critical interest-rate level exists, below which a financial crisis takes place and the economy transitions from the good to the bad BGP. At this tipping point for the economy, banks’ franchise value of deposits goes down, since their net interest margins are compressed. This leads to a fall in bank equity, which gives depositors an incentive to run. The tipping point is not necessarily negative or zero. It is an increasing function of the persistence of the change in the interest rate. Since a persistent fall in the interest rate compresses the net interest margin further in the future, it damages the franchise value of deposits more for any given interest-rate cut.
JEL Code
E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects
E50 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→General
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
Network
Research Task Force (RTF)