Publications
Review of Economic Dynamics, April 2025. [SSRN][NBER WP][ECB conference video]
"The Role of International Financial Integration in Monetary Policy Transmission," with Jing Cynthia Wu and Ji Zhang.
IMF Economic Review, May 2024. [SSRN][NBER WP]
"Fiscal and Monetary Stabilization Policy at the Zero Lower Bound: Consequences of Limited Foresight," with Michael Woodford.
Journal of Monetary Economics, January 2022. [NBER WP][Press: Economist, NY Fed Blog]
Journal of International Economics, May 2020. [2022 Pu Shan Award]
AEA Papers and Proceedings, May 2019.
"Machiavellian Experimentation," with Yang Xie.
Journal of Comparative Economics, December 2017. [Lead article]
Abstract: We present new facts on how convenience yields fluctuate with macroeconomic variables and fiscal policy: the convenience yield of long-term Treasuries is negatively correlated with inflation expectations, and inflation expectations predict future debt-to-GDP growth. To rationalize these findings, we incorporate the convenience yield into a macro-finance model with endogenous fiscal policy. The government finances deficit shocks partially through higher inflation and partially through more future borrowing, which reduces the convenience yield today. The feedback loop between the convenience yield and future debt supply amplifies the effect of fiscal shocks. We further verify this channel using empirically constructed exogenous deficit shocks.
Abstract: This paper investigates exchange rate dynamics and its forecast errors by incorporating bounded rationality in a small open-economy New Keynesian model. Decision-makers possess limited foresight, capable of planning only up to a finite distance into the future. This yields dynamic overshooting of forecast errors in the real exchange rate across different time horizons. It also distinguishes between short- and long-term expectation formations, where the Law of Iterated Expectations breaks. This framework provides a micro-foundation for understanding time- and forecast-horizon variability in uncovered interest parity (UIP) puzzles. Our model predictions on these UIP violations align both qualitatively and quantitatively with empirical estimates.
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.
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.
"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.
"Does Unconventional Monetary and Fiscal Policy Contribute to the COVID Inflation Surge?" with Jing Cynthia Wu and Ji Zhang.
This version: September 2024. [SSRN][NBER WP][Press: Yahoo! Finance]
Abstract: We assess whether unconventional monetary and fiscal policy implemented in response to the COVID-19 pandemic contribute to the 2021-2023 inflation surge through the lens of several empirical methodologies---event studies, vector autoregressions, and regional panel regressions using granular data---and establish a null result. The key economic mechanism works through a disinflationary channel in the Phillips curve while monetary and fiscal stimuli put positive pressure on inflation through the usual demand channel. We illustrate this negative supply-side channel both theoretically and empirically.