Journal of Monetary Economics, January 2022. [Published version][Press: Economist, NY Fed Blog]

Summary: We reconsider the degree to which macroeconomic stabilization is possible when the zero lower bound is a relevant constraint, under an assumption of bounded rationality.

Journal of International Economics, May 2020.

Summary: We study the implications of global supply chains for the design of optimal monetary policy.

AEA Papers and Proceedings, May 2019.

Summary: We review a variety of alternative policy options under the zero lower bound (ZLB) when the foresight of decision-makers is limited.

Journal of Comparative Economics, December 2017. (Lead article)

Summary: We propose a mechanism whereby polarization of beliefs could eliminate political gridlock instead of intensifying disagreement.

Working Papers

July 2020. [under revision]

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.

NBER Working Paper No. w24319, updated November 2021. [Press: Brookings]

Abstract: While two strands of the literature suggest that PPI inflation, in addition to or instead of 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 produces additional predictions that are also confirmed in the data. As such changes are structural rather than temporary, the standard monetary policy rule that does not target the PPI inflation may have become increasingly problematic.

  • "The Convenience Yield, Inflation Expectations, and Public Debt Growth," with Zhiyu Fu and Jian Li.

January 2022. [Draft available upon request]

Abstract: U.S. long-term treasury debt serves the important role of safe and liquid assets in the economy, hence carrying significant convenience yields. We present two new findings relating the convenience yield to inflation and government fiscal policy. First, the convenience yield of treasury debt is negatively correlated with inflation expectations. Second, inflation expectations predict future debt-to-GDP growth at different horizons. To explain these findings, we incorporate convenience yields into a staggered-price model with an active fiscal policy. The convenience yield for long-term debt is the discounted value of future convenience service flows, thus is negatively correlated with future debt supply. Furthermore, a government deficit shock leads to both higher debt in the future as well as higher expected inflation simultaneously. The model rationalizes the two empirical findings, and provides a natural framework to study the interactions among inflation, debt growth, and cost of borrowing, particularly the convenience yield component.

Work in Progress

  • "A Behavioral New Keynesian Model of a Small Open Economy under Limited Foresight," with Seunghoon Na.

  • "Price-level Targeting at the Zero Lower Bound when Foresight is Limited," with Michael Woodford.

  • "Asymmetric Policy Responses to Foreign Monetary Policy Shocks," with Qingyuan Du and Shang-Jin Wei.

  • "Monetary Policy and the Maturity of Corporate Debt."