Macroeconomics, Monetary and Financial Economics, Chinese Economy
Publications in English:
- Credit Search and Credit Cycles, joint with Pengfei Wang and Yi Wen, Economic Theory, 61(2), pp.215-239
Working Papers in English:
- Adverse Selection and Self-Fulfilling Business Cycles, joint with Jess Benhabib and Pengfei Wang, R&R
Abstract: We present a dynamic general equilibrium model of production economies with adverse selection in the financial market to study the interaction between funding liquidity and market liquidity and its impact on business cycles. Entrepreneurs can take on short-term collateralized debt and trade long-term assets to finance investment. Funding liquidity can erode market liquidity. High funding liquidity discourages firms from selling their good long-term assets since these good assets have to subsidize lemons when there is information asymmetry. This can cause a liquidity dry-up in the market for long-term assets and even a market breakdown, resulting in a financial crisis. Multiple equilibria can coexist. Credit booms combined with changes in beliefs can cause equilibrium regime shifts, leading to an economic crisis or expansion.
Abstract: In responding to the extremely weak global economy after the financial crisis in 2008, many industrial nations have been considering or have already implemented negative nominal interest rate policy. This situation raises two important questions for monetary theories: (i) Given the widely held doctrine of the zero lower bound on nominal interest rate, how is a negative interest rate (NIR) policy possible? (ii) Will NIR be effective in stimulating aggregate demand? (iii) Are there any new theoretical issues emerging under NIR policies? This article builds a model to show that (i) money injections can remain effective even when the nominal bank lending rate has reached zero or become negative; (ii) it is a good policy to keep the nominal interest rate as low as possible by purchasing government bonds with money; and (iii) the conventional wisdom on the notion of the liquidity trap and the Fisherian decomposition between the nominal and real interest rate can be invalid.
Abstract: We provide an infinite-horizon model of rational asset bubbles in a dynamic new Keynesian framework. Entrepreneurs are heterogeneous in investment efficiency and face credit constraints. They can trade land as an asset, which also serves as collateral when borrowing from banks with reserve requirements. Land commands a liquidity premium and a land bubble can emerge. Monetary policy can affect the conditions for the existence of a bubble, its steady-state size, and its dynamics including the initial size. The `leaning against the wind' interest rate policy reduces bubble volatility, but it could also raise inflation volatility. Whether monetary policy should respond to asset bubbles depends on the particular interest rate rule adopted by the central bank and on the type of exogenous shocks hitting the economy.
- Flight to Liquidity or Quality: Dissecting Liquidity Shortage in Financial Crisis, joint with Yi Wen
- Adverse Selection, Search, and Information Acquisition, new draft coming soon
- A Search-Based Model of Capital Reallocation, joint with Pengfei Wang and Yi Wen, new draft coming soon
- Capital Misallocation and Unemployment, new draft coming soon
- A Real Business Cycle Model of Monetary Policy with Heterogeneous Agents in Production Network, joint with Yi Wen, new draft coming soon
Working in Progress (new draft coming soon; old draft available upon request):
- To Leverage or Not, joint with Wei Cui
- Cycles of Credit Expansion and Misallocation: The Good, The Bad, and The Ugly, joint with Zhiwei Xu
- Housing Dynamics and Chinese Business Cycles: a Role of Economic Uncertainty, joint with Jianfeng Liu and Zhiwei Xu
Publications in Chinese (中文发表):
- 价格刚性、异质性预期和通货膨胀动态 (Nominal Rigidity, Heterogeneous Expectation and Inflation Dynamics), 合作者：邓燕飞、徐迎风、冯文伟，《管理世界》即将刊印, (joint with Yanfei Deng, Yingfeng Xu, and Wenwei Feng, forthcoming at Management World).
Working Papers in Chinese (中文在研论文):
- 金融发展、企业债务与劳动收入份额 (Financial Development, Firm Debt, and Labor Share), 合作者：申广军、焦阳 (joint with Guangjun Shen and Yang Jiao)