Yinxi Xie - Research

Publications

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

Review of Financial Studies, accepted. [SSRN]

"Unconventional Monetary and Fiscal Policy," with Jing Cynthia Wu.

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]

"Monetary Policy in an Era of Global Supply Chains," with Shang-Jin Wei.

Journal of International Economics, May 2020. [NBER WP][2022 Pu Shan Award]

"Policy Options at the Zero Lower Bound When Foresight is Limited," with Michael Woodford.

AEA Papers and Proceedings, May 2019.

"Machiavellian Experimentation," with Yang Xie.

Journal of Comparative Economics, December 2017. [Lead article]

Working Papers

"Expectations and the UIP Puzzles when Foresight is Limited," with Seunghoon Na.

R&R at Journal of International Economics. This version: February 2025. [SSRN][BoC WP]
Previously circulated as “A Behavioral New Keynesian Model of a Small Open Economy under Limited Foresight”

Abstract: This paper investigates the dynamics of exchange rates and its forecast errors by incorporating bounded rationality into a small open-economy New Keynesian model. Decision-makers possess limited foresight, capable of planning only up to a finite horizon into the future. Beyond this horizon, they approximate continuation values using coarse value functions learned from past experiences. This yields dynamic overshooting of forecast errors of the real exchange rate across different time horizons, while also differentiating short-term with long-term expectation formation. Our model provides a micro-foundation for understanding time- and forecast-horizon variability in uncovered interest parity (UIP) puzzles. The model's predictions on these UIP violations align both qualitatively and quantitatively with empirical estimates.

"On the Wedge between the PPI and CPI Inflation Indicators," with Shang-Jin Wei.

R&R at American Economic Journal: Macroeconomics. This version: June 2022. [NBER WP][Press: Brookings, NBER Homepage]

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: 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.

"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.