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: We endogenize the liquidity and the quality of private assets in a tractable incomplete-market model with heterogeneous agents. The model decomposes the convenience yield of government bond into a "liquidity premium" (flight to liquidity) and a "safety premium" (flight to quality) over the business cycle. When calibrated to match the U.S. aggregate output fluctuations and bond premiums, the model reveals that a sharp reduction in the quality, instead of the liquidity, of private assets was the culprit of the recent financial crisis, consistent with the perception that it was the subprime mortgage problem that triggered the Great Recession. Since the provision of public liquidity endogenously affects the provision of private liquidity, our model indicates that excessive injection of public liquidity during financial crisis can be welfare reducing under either conventional or unconventional policies. In particular, too much intervention for too long can depress capital investment.
Abstract: In responding to the extremely weak global economy after the financial crisis in 2008, many industrial nations have implemented negative nominal interest rate (NIR) policy. This situation raises some important questions for monetary theories, such as: (i) Given the widely held doctrine of the zero lower bound on nominal interest rate, how is a NIR policy possible? (ii) Will NIR be effective in stimulating aggregate demand? This article builds a tractable heterogenous-agent incomplete-market model to address these questions. We show that money injections can remain effective under negative nominal interest rate if it is effective under positive interest rate. An important theoretical contribution of our paper is to show that the conventional wisdom on the notion of the liquidity trap and the Fisherian decomposition between the nominal and real interest rates 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.
- A Real Business Cycle Model of Monetary Policy with Heterogeneous Agents in Production Network, joint with Yi Wen, new draft coming soon
- 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
- Cycles of Credit Expansion and Misallocation: The Good, The Bad and The Ugly, joint with Zhiwei Xu, new draft coming soon
- Capital Misallocation and Unemployment, new draft coming soon
Working in Progress (new draft coming soon; old draft available upon request):
- To Leverage or Not, joint with Wei Cui
- 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)