The Risk-Premium Channel of Uncertainty: Implications for Unemployment and Inflation (with Lukas B. Freund and Pontus Rendahl) [replication codes]
- Forthcoming at Review of Economic Dynamics

This paper studies the role of macroeconomic uncertainty in a search-and-matching framework with risk-averse households. Heightened uncertainty about future productivity reduces current economic activity even in the absence of nominal rigidities. A risk-premium mechanism accounts for this result. As future asset prices become more volatile and covary more positively with aggregate consumption, the risk premium rises in the present. The associated downward pressure on current asset values lowers firm entry, making it harder for workers to find jobs and reducing supply. With nominal rigidities the recession is exacerbated, as a more uncertain future reinforces households’ precautionary behavior, which causes demand to contract. Counterfactual analyses using a calibrated model imply that unemployment would rise by less than half as much absent the risk-premium channel. The presence of this mechanism implies that uncertainty shocks are less deflationary than regular demand shocks, nor can they be fully neutralized by monetary policy.

Working papers

Striking While the Iron Is Cold: Fragility after a Surge of Lumpy Investments [appendix] [RePEc]

  • Winner of the Best Paper Award for Early Career Academics at Econometric Society Australasia Meeting 2022

  • Winner of the Hiram C. Haney Fellowship Award in Economics

  • Winner of the Thomas J. Sargent Dissertation Fellowship at the Federal Reserve Bank of San Francisco.

This paper studies the endogenous state dependence of the aggregate investment dynamics stemming from synchronized lumpy investments at the firm level. I develop a heterogeneous-firm real business cycle model where the semi-elasticities of large and small firms’ investments are matched with the empirical estimates. In the model, following a negative TFP shock, the timings of large firms’ lumpy investments are persistently synchronized due to the low sensitivity to the general equilibrium effect, leading to a surge of lumpy investments. After the surge, TFP-induced recessions are especially severe, and the semi-elasticity of the aggregate investment drops significantly.

Job market paper version: link

Solving DSGE Models Without a Law of Motion: An Ergodicity-Based Method and an Application
[appendix] [slides] [RePEc]

This paper develops a novel method to solve dynamic stochastic general equilibrium models globally and accurately without specifying the law of motion. The method is based on the ergodic theorem: if a simulated path of the aggregate shock is long enough, all the possible equilibrium allocations are realized somewhere on the path. Then, the rationally expected future value function at each period on the path can be completely characterized by identifying the periods with each possible future state realization and by combining the corresponding time-specific value functions. The method provides an accurate solution even for models with highly nonlinear aggregate fluctuations. I apply this method to a heterogeneous-firm business cycle model with the corporate saving glut where the aggregate corporate cash stocks nonlinearly fluctuate. This nonlinearity leads to the state-dependent sensitivity of consumption to a TFP shock through the corporate dividend channel.

Top Income Inequality and the Business Cycle

This paper studies how the pass-through businesses of top income earners affect the aggregate fluctuations in the U.S. economy. I develop a heterogeneous-household real business cycle model with endogenous labor supply and occupational choice and calibrate the model to capture the observed top income inequality. Compared to the counterfactual economy with the factor-income-driven top income inequality, the economy in the baseline model features the aggregate fluctuations that outperform in explaining the recent changes in the business cycle: 1) lower volatility of aggregate output and 2) stronger negative correlation between labor hour and productivity. Heterogeneous labor demand sensitivities to TFP shocks between pass-through businesses and C-corporations build the core of the aggregate dynamics, and the aggregate employment dynamics display substantial nonlinearity due to this heterogeneity.

Rising Intangible Capital and the Disappearance of Public Firms (with Sara Casella and Sergio Villalvazo) [slides]

Since 1996, the number of listed firms in the U.S. has decreased by around 50%. Using U.S. Compustat and earnings surprises from I/B/E/S data, we document that the financial reports of listed firms required by the U.S. Securities and Exchange Commission’s (SEC) regulation have become significantly less transparent over the same period. To theoretically and quantitatively analyze these secular trends, we develop a heterogenous-firm equilibrium model where the endogenous choice to go public or private and the distribution of the firm-level allocations are characterized by closed-form solutions. In the model, each listed firm’s publicly disclosed intangible is diffused to other firms’ productivity as an externality. In the estimated model, the increased intangible share has substantially decreased the average transparency of the financial disclosure and the number of listed firms. This leads to significant losses in welfare and productivity due to reduced technology diffusion. Finally, we characterize a policy maker’s dilemma between maximizing welfare and productivity. According to the estimation, the recent stricter SEC disclosure requirement has significantly mitigated the welfare cost induced by rising intangibles at the cost of productivity loss.

Infrastructure Fiscal Multiplier and Corporate Taxations (with Minsu Chang)

We study whether the infrastructure investment is beneficial by quantifying the public infrastructure investment multipliers. We build a heterogeneous firm general equilibrium model to provide a micro-foundation for the multipliers with firms’ investment decisions. We estimate our general equilibrium model that informs us about the elasticity of substitution between public capital and private capital using the state-level variation in infrastructure spending. We find that private capital is a gross substitute for public capital at the firm level, while it is a gross complement of public capital at the state level when the non-rivalry nature of the public infrastructure is considered at the firm level. According to the estimated baseline model, the short-run fiscal multiplier with respect to output slightly exceeds unity. In addition, we illustrate that the multipliers are substantially different across financing methods such as lump-sum payments and corporate taxation. Heavier corporate taxation leads to dampened fiscal multipliers as firms’ investment is crowded out. This crowding out of private investments is shown to be dominantly driven by the increase in the interest rate and the wage.

Work in Progress

Rising Intangibles and Technology-Biased Technical Change (with Jesús Fernández-Villaverde)

An Analytical Theory of Firm Dynamics under the Real and Financial Frictions (with Vasco M. Carvalho)

Labor Market Impact of M&A and Skill Complementarity (with Minji Bang)


Understanding Trend Inflation Through the Lens of the Goods and Services Sectors (by Yunjong Eo, Luis Uzeda, and Benjamin Wong), Japan-Korea Economic Society Academic Exchange Workshop, 2022 [slides]