Working Papers
Exchange Rate Regime and Optimal Policy: The Case of China, with Yujeong Cho, and Yiping Huang. R&R at Journal of International Money and Finance
Abstract: This study examines how financial frictions in a situation with foreign currency denominated debt would affect the Chinese economy and social welfare using a small open economy model with China’s characteristics. We find that the financial channel, as well as the trade channel, operates well in response to various external shocks. In addition, macroeconomic variables are more stable and bring higher welfare under a floating exchange rate system than under a fixed exchange rate system. Finally, in an economy with macroprudential policies, such as a capital inflows tax and financial regulation, welfare is higher than in an economy without such policies, under either exchange rate regime. This analysis has important policy implications for the choice of exchange rate regime and for foreign debt management in China.
BigTech Credit and Monetary Policy Transmission: Micro-level Evidence from China, with Yiping Huang, Xiang Li, Han Qiu. Reject and resubmit at Management Science
Abstract: This paper studies monetary policy transmission through BigTech and traditional banks. By comparing business loans made by a big tech bank with traditional banks, we find that BigTech loans tend to be smaller, and BigTech bank grants credit to more new borrowers than conventional banks responding to expansionary monetary policy. Advantages in information, monitoring and risk management of BigTech banks are the potential mechanisms. On the other hand, BigTech and traditional bank credits to firms that have already borrowed from these banks respond similarly to monetary policy changes. Overall, BigTech credit amplifies monetary policy transmission mainly through this extensive margin. In addition, monetary policy has a stronger impact on the real economy through BigTech lending than traditional bank loans.
Production Networks and Supply-Side Effect of Monetary Policy , with Zhihao Xu, Revise and Resubmit at Journal of Economic Theory
This paper studies the supply-side effect of monetary policy, theoretically and quantitatively, in a multisector economy with input-output linkages. Our model features industry-level price rigidities and initial markups. It derives analytically expressions for the supply-side effect of monetary policy and welfare as a function of primitives. The supply-side effect of monetary policy is determined by a sufficient statistic, which can be broken down into two components: the covariance between network-adjusted industry price rigidity and network-adjusted industry initial markup, and the product of average network-adjusted initial markup and average network-adjusted price rigidity. The slope of all sectoral and aggregate Phillips curves become flatter when there is a supply side effect of monetary policy. We then characterize the optimal policy in terms of the economy's production networks, nominal rigidities and initial markups: the optimal policy leads to an inflation bias due to both initial markups and the supply side effect, and stabilizes a price index by assigning greater weights to (i) larger industries, (ii) industries with stickier prices, and (iii) industries with lower initial markups. In a calibrated version of the model, we find that monetary policy has a strong impact on the supply side of the economy. In addition, stabilizing output outperforms stabilizing CPI inflation in terms of welfare. Without production networks, the supply-side effect of monetary policy declines substantially.