Yinxi Xie - Research

Abstract: While two strands of the literature suggest that producer price index (PPI) inflation, in addition to or instead of consumer price index (CPI) inflation, should be a targeting variable in a monetary policy rule, the distinction between the two is only important when they do not co-move strongly. Our first contribution is to document that their correlation has indeed fallen substantially since the start of this century. Our second contribution is to propose a model to understand this divergence based on expanding global supply chains. Our theory also produces additional predictions that are confirmed in the data. As such changes are structural rather than temporary, and so does the co-movement between CPI-PPI inflation, it implies that central banks need to take the change in the production structure of the economy into account when deciding their inflation target.

"Understanding Inflation Dynamics: The Role of Government Expenditure," with Chang Liu.

This version: September 2024. [SSRN][BoC WP][BCB Conference video][Press: The Canadian Press]

Abstract: This paper studies the impact of government expenditure on inflation through the lens of an augmented Phillips curve derived from a structural New Keynesian model. Our estimation results, based on external instruments, show that the augmented Phillips curve has a flatter slope than the canonical specification, and government expenditure has a negative coefficient. Changes in government expenditure account for a substantial portion of inflation variations and provide new insights into the "missing disinflation" puzzle. We also observe a negative response of both inflation and inflation expectations to government expenditure shocks, which can be rationalized by the supply-side channel that we emphasize.

"Does Unconventional Monetary and Fiscal Policy Contribute to the COVID Inflation Surge?" with Jing Cynthia Wu and Ji Zhang.

This version: July 2025. [SSRN][NBER WP][Press: Yahoo! Finance]

Abstract: We investigate whether unconventional monetary and fiscal policy enacted in response to the COVID-19 pandemic contributed to the 2021–2023 inflation surge. Through the lens of multiple complementary empirical strategies, including event studies, vector autoregressions, and regional panel regressions, we establish a null result across all approaches. Our findings challenge the popular view in the media that pandemic-era stimulus caused recent inflation. The key economic mechanism operates through a disinflationary supply-side channel in the Phillips curve, which offsets the upward pressure on inflation from the usual demand channel. We demonstrate this mechanism both theoretically and empirically.

"Fiscal Policy: Financing and Indebtedness," with Jing Cynthia Wu, Shihan Xie, and Ji Zhang.

This version: May 2025. [SSRN]

Abstract: We conduct a large-scale information randomized controlled trial (RCT) in five Eurozone countries to examine how households change their expectations regarding macroeconomic variables in response to a fiscal policy shock. While a positive shock to government spending is generally stimulative, we find its effects vary depending on the financing method and the country's level of public debt. When tax financing, fiscal multipliers are similar across countries with different debt-to-GDP ratios. However, a novel finding is that countries with higher debt levels exhibit smaller multipliers when fiscal policy is financed by issuing debt, and whether debt or tax financing is more stimulative depends on a country's indebtedness. To explain these findings, we propose a New Keynesian model featuring fiscal discipline and proportional taxes.

"Fiscal and Monetary Policy Interaction under Limited Foresight."

New version coming soon

Abstract: Analyses of the interaction between monetary and fiscal policy often turn crucially on assumptions that are made about outcomes far in the future, sometimes infinitely far. This is a problematic feature of rational-expectations analyses, given the limited basis for assumptions about the distant future. This paper instead considers both short-term effects and long-run consequences of alternative monetary and fiscal policies under an assumption of bounded rationality. In particular, it assumes that explicit forward planning extends only a finite distance into the future, with anticipated situations at that horizon evaluated using a value function learned from past experience. Such an approach makes announcements of future policies relevant, but avoids the debates about equilibrium selection that plague rational-expectations analyses. The combined monetary-fiscal regimes that result in stable long-run dynamics are characterized, and the effectiveness of temporary changes in either type of policy as a source of short-run demand stimulus is analyzed. The effectiveness of a coordinated change in monetary and fiscal policy is shown to be greatest when decision makers' degree of foresight is intermediate in range (average planning horizons on the order of ten years), rather than shorter or longer.