Macroeconomics, Monetary and Financial Economics, Chinese Economy
Publications in English:
The supply and demand of credit are not always well aligned, as is reflected in the countercyclical excess reserve-to-deposit ratio and interest spread between the lending rate and the deposit rate. We develop a search-based theory of credit allocations to explain the cyclical fluctuations in both bank reserves and interest spread. We show that search frictions in the credit market can naturally explain the countercyclical bank reserves and interest spread, as well as generate endogenous business cycles driven primarily by the cyclical utilization rate of credit resources, as long conjectured by the Austrian school of the business cycle. In particular, we show that credit search can lead to endogenous local increasing returns to scale and variable capital utilization in a model with constant returns to scale production technology and matching functions, thus providing a micro-foundation for the indeterminacy literature of Benhabib and Farmer (1994) and Wen (1998).
- The Perils of Credit Booms, joint with Jianjun Miao and Pengfei Wang, Economic Theory, forthcoming.
- Adverse Selection and Self-Fulfilling Business Cycles, joint with Jess Benhabib and Pengfei Wang, Journal of Monetary Economics, forthcoming.
Working Papers in English:
- Long and Plosser Meet Bewley and Lucas: A Model of Monetary Policy with Heterogeneous Agents in Production Network, joint with Yi Wen
- prepared for the Carnegie Rochester NYU conference on public policy
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 bubble assets to raise their net worth. The bubble assets command a liquidity premium and can have a positive value. 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.
The 2007 global financial crisis has generated episodes of flight to liquidity and quality with lasting high uncertainty, especially in the age of the shortage of safe assets. This is particularly true for developing economies like China, in which financial market is underdeveloped and the financial account is tightly regulated. Moreover, both the household-level and aggregate data suggest a higher economic uncertainty boosts the price of housing with relatively good quality. Motivated by the empirical facts, we embed housings as safe assets into a dynamic general equilibrium model with incomplete markets. With calibration on the Chinese economy, we show that household's holding housing to fight against the increasing uncertainty delivers a housing boom, crowding out resources that could have been allocated to the real sector, and resulting in a recession. We further incorporate the major policy intervention in Chinese housing market, i.e., the house-purchase limit policy, into our baseline model. Policy intervention does effectively curb the house prices and dampen the crowding out effect, but at the cost of restricting households' access to housings as the store of value, and thus lowers welfare by magnifying consumption dispersion. Consequently, the policy intervention faces a trade-off between macro-level stability and micro-level volatility.
- Cycles of Credit Expansion and Misallocation: The Good, The Bad and The Ugly, joint with Zhiwei Xu
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.
- Flight to Liquidity or Quality: Dissecting Liquidity Shortage in the Financial Crisis, joint with Yi Wen
The importance of capital reallocation between firms has been increasing over time, with the purchase of used capital accounting for 25% to 40% of firms' total investment nowadays. Cross-firm reallocation of used capital also exhibits intriguing business-cycle properties, such as (i) the quantity of used capital reallocation across firms is procyclical, (ii) the prices of used capital are procyclical and more so than those of new capital goods, and (iii) the dispersion of firms' TFP (or the benefit of capital reallocation) is countercyclical. We build a search-based neoclassical model to qualitatively and quantitatively explain these stylized facts. We show that search frictions in the capital market are essential for our empirical success but not sufficient---financial frictions and endogenous movements in the distribution of firm-level TFP and interactions between used-capital investment and new investment are also required to simultaneously explain these stylized facts, especially that prices of used capital are more volatile than that of new investment and the dispersion of firms TFP is countercyclical.
- A Tale of Two Market Structure: Adverse Selection, Search, and Strategic Venue Selection between Exchange and OTC Markets
- Aggregate Implications of Financial Frictions for Unemployment
Working in Progress (new draft coming soon; old draft available upon request):
- To Leverage or Not, joint with Wei Cui
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》2017年9月刊, (joint with Yanfei Deng, Yingfeng Xu, and Wenwei Feng, Management World, 2017).