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.
- 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, 94, pp.114-130.
- 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.
Housing assets serve as an important store of value in the economy with high saving rate and a shortage of safe asset. Empirical evidence shows that housing price grows more in the cities that experienced larger increase in the idiosyncratic income risks in China. Moreover, housing with good quality are valued more in Beijing when the aggregate macroeconomic uncertainty increases. We incorporate housing assets in an incomplete-market general equilibrium in which households are facing idiosyncratic income risks. Households self-insure their consumption against income risks by participating in the private bond market with zero net supply and in the housing market with positive supply. We show that increasing idiosyncratic income risks create a housing boom and the reallocation of resources from the real production sector towards the %housing sector. Government policy that reduce the households demand for housing asset, such as purchase-limit, may leads to welfare loss. This can happen because government regulation creates asset shortage in the housing market and leads to the increases in the consumption dispersion. The final results hinges on the housing price effect and the consumption dispersion effect.
- 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 (drafts are 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).