Publications

7. "Central Bank Digital Currency and Banking: Macroeconomic Benefits of a Cash-Like Design" Joint with Jonathan Chiu, Management Science, 2023. (Published Version) (Working Paper)

Short description: We discuss macroeconomic benefits of a cash-like CBDC compared with a deposit-like CBDC. A cash-like CBDC crowds in banking even in the absence of banks' market power and leads to higher consumption and welfare. We quantify the effects of a CBDC and decompose them into three channels: payment efficiency, price effects and bank funding costs. 

6. "Bank Market Power and Central Bank Digital Currency: Theory and Quantitative Assessment," Joint with Jonathan Chiu, Janet Hua Jiang and Yu Zhu, Journal of Political Economy, 2023. (Published Version) (Working Paper)

Media coverage: Economist

Non-technical summary: LSE Business Review

Winner of the Bank of Canada's Top Research Award, 2022

Short description:  We build a general equilibrium model with imperfect competition in the banking sector where banks issue deposits and make loans, and deposits can be used as payment instruments by households. We use the model to assess the effects of introducing central bank digital currency (CBDC).
CBDC can improve the efficiency of bank intermediation and increase lending and aggregate output even if its usage is low. This is because CBDC serves as an outside option for households, thus limiting banks' market power in the deposit market. In our calibration exercise, we show that with a proper interest rate, CBDC can raise bank lending and investment by around 3.6% and increase output by around 0.5%. 

5. "Optimal Taxation in Asset Markets with Adverse Selection," European Economic Review, 2022. (Published Version) (Working Paper)

Short description: We know from my 2019 JET paper that there are inefficiencies in environments with search frictions and adverse selection, such as OTC markets, and that a correcting tax schedule exists. The main contribution of the present paper is to characterize the optimal tax schedule and show that it can be non-monotone in the price of assets. This implies that restricting attention to linear taxation, as typically assumed in the literature, is misleading. Quantitatively, linear taxation can amount to large welfare losses compared with the optimal taxation especially when the matching function is highly non-linear, like the exponential matching function used in many economic applications.

4. "Central Bank Digital Currency and Monetary Policy," Journal of Economic Dynamics and Control, 2021. (Published Version) (Working Paper)

Media coverage: Coindesk, Cryptodisrupt, Ethnews, Bitrazzi, Zycrypto

Among top-5 most cited articles from the JEDC published since 2020 as of December 2023 (Link). 

Short description: Many central banks are contemplating whether to issue ''electronic money" or ''digital currency". Central Bank digital currency (CDBC) has certain possible advantages including the possibility that it can bear interest rate. If the central banks issue digital currency, then CBDC will coexist with other means of payments including cash. I put together a model in which cash and CBDC co-exist and heterogeneous agents can choose their portfolios with varying mixtures. I show that CBDC provide more flexibility for the central bank to conduct monetary policy. This is because the central bank can monitor agents' portfolios of digital currency and cross-subsidize between different types of agents, while this is not possible with cash.

3. "Adverse Selection with Heterogeneously Informed Agents," International Economic Review, 2020. (Published Version) (Working Paper) 

Short description: I model an OTC market with two features: (i) Lemons market: Sellers have private information about their asset value and reservation value, and (ii) Heterogeneous buyers: Some buyers are informed in that they can identify high-quality assets. 

Here are main results. First, more information may hurt: With low measure of informed buyers, as more buyers become informed, the liquidity, price and welfare decrease. Second, when the measure of informed buyers is intermediate, multiple equilibria arise due to strategic complementarity in (i) sellers’ actions in choosing which buyers to trade with, and (ii) buyers’ actions in acquiring the information technology.

2. "A Policy Framework for E-Money," Joint with Francisco Rivadeneyra, Canadian Public Policy, 2020. (Published Version) (Discussion Paper)

Media coverage: Centralbanking

1. "Constrained Efficiency with Adverse Selection and Directed Search," ​Journal of Economic​ ​Theory, 2019​.​ (Published Version) (Working Paper)

Short description: I study constrained efficiency in the environment of Guerrieri, Shimer and Wright (2010) and show that equilibrium is generically constrained inefficient, in the sense that the planner who faces the same search and information frictions can improve the allocation compared to the market allocation. I show that the planner can even achieve the first best.

Working Papers and Work in Progress

Monetary Economics

8. "Central Bank Digital Currency and Transmission of Monetary Policy," Joint with Saroj Bhattarai and Zhenning Zhao (Work in Progress)

Short description: Would issuance of a Central Bank Digital Currency (CBDC) help central banks in achieving macroeconomic stabilization? Would the responses of an economy change if CBDC is used as a main monetary policy tool instead of central bank reserves? We study these questions in a model with nominal rigidities and financial intermediation. In our model, commercial bank deposits, CBDC and cash are all used as means of payments and provide liquidity services to households. Banks issue deposits and extend loans to financially constrained firms who produce intermediate goods sold to final good producers. The deposits are partially backed by central bank reserves. The model helps evaluate the potential benefits of a CBDC, and how different designs of a CBDC (e.g., the degree of substitution between CBDC and other means of payments, and whether or not it bears interest) affect monetary policy transmission.

9. "Safe Payments," Joint with Jonathan Chiu, Janet Hua Jiang and Yu Zhu. (Working Paper)

Short description: Currently, there are two main types of payment instruments: cash and deposit-based electronic payments. Cash is a liability of the central bank and is perceived to be very safe. Deposits are liabilities of commercial banks; they are normally safe but are subject to default risk in times of crisis. As the economy becomes increasingly cashless, can we rely on the private sector to invest in the optimal level of safety in the electronic payment system? We answer this question by modelling private incentives to invest in safety in a deposit-based payment system. Depositors can mitigate the risk in the system through monitoring to reduce the risk of default before it happens (ex ante) or through monitoring for timely detection of defaults after they’ve occurred (ex post). In addition, they can also set up a separate, safe account as a backup to receive funds from the risky account in a crisis situation. We find that because depositors do not internalize the externalities in the payment system, the private sector can over- or under-adopt the use of safe accounts. However, governments could use taxes or subsidies to correct private incentives and restore the optimal adoption of safe accounts.

10. "Payments Data, Monetary Policy and CBDC," Joint with Jonathan Chiu, Janet Hua Jiang and Yuteng Cheng

Short description: In this project we explore the implications of data monetization by private payment providers. We study the trade-off between privacy loss and the social value of payment data. We will investigate whether the private payment system can generate the efficient level of data collection and usage, and if not, whether the CBDC is the right response. 

Search Theory and Over-The-Counter Markets

11. "Directed Search with Complementarity and Adverse Selection" (SSRN Link)

Short description: I study patterns of sorting between workers and firms. I extend Eckhout and Kircher (2010) by introducing (i) firms' ex-ante capital investment and (ii) common-value private information about the type of workers. I show that the condition in Eckhout and Kircher (2010) is not necessary nor sufficient for this economy to exhibit positive assortative matching (PAM). That is, PAM may arise simply as a result of firms screening workers, not because of enough degree of complementarity between factors of production. I give exact conditions under which PAM arises under private information.

12. "Dealer Inventory and Market Liquidity," Joint with Jonathan Chiu and Janet Hua Jiang

Policy and Review Papers

13. "Central Bank Digital Currencies and Banking: Literature Review and New Questions," Joint with James Chapman, Jonathan Chiu, Janet Jiang, Francisco Rivadeneyra and Yu Zhu, 2023. (Discussion paper)

14. Contribution to "Central Bank Digital Currencies: Financial Stability Implications" published by Bank for International Settlements 2021. (Discussion paper) 

Note: This paper is part of a bigger project (here). 

15. "CBDC and Monetary Policy," Joint with Francisco Rivadeneyra and Yu Zhu. (Analytical Note)

Special Lectures and Panels

• I have given multiple lectures on topics related to CBDC such as CBDC implications for monetary policy and banking system and CBDC and monetary policy in the courses organized by Central Banking. See the list of courses offered in May 2022 here.

• I participated in a panel, the role of stablecoins in the payment landscape. The slides are available upon request.