Publications
"Estimating the Income Elasticity of Marginal Utility: A Study Using South Korean Household Survey Data," (with Young Jun Chun and Jeong Hwan Lee), Korean Economic Review, forthcoming.
Abstract: In this study, we estimate the elasticity of the marginal utility of income using nationally representative household survey data from South Korea, following the direct measurement approach of Layard et al. (2008). Our findings suggest that the income elasticity of marginal utility for the broader population is 1.49 and remains stable over time. Moreover, we explore potential heterogeneity in the income elasticity of marginal utility among individuals. Statistically significant differences in this elasticity are observed across subgroups defined by various demographic and socioeconomic characteristics, including age, marital status, employment status, health status, educational attainment, and net asset positions.
"The Stimulative Effects of Anticipated Government Spending Expansions: Evidence from Survey Forecasts," (with Xiaole Li), Hitotsubashi Journal of Economics 65(1), 1-31, 2024.
Abstract: We employ a maximum forecast error variance VAR identification strategy to examine the effects of anticipated government spending expansions. In our post-1981 U.S. sample, an anticipated expansion in government spending is delayed and persistent. This expansion is associated with increases in consumption and investment, as well as in real wages and hours. It also has an accelerator effect on private capital investment and a delayed stimulative effect on private sector productivity. Moreover, the monetary and tax policies accompanying the anticipated government spending expansion align well with the Fed's dual mandate and with less progressive federal tax reforms, respectively.
"A Reconsideration of the Failure of an S-shaped Response of TFP to a Technological Diffusion News," (with Xiaole Li), Journal of Economic Research 27(3), 255-291, 2022.
Abstract: We re-examine empirical results on news shocks to TFP by aiming at identifying a technological diffusion news that produces an S-shaped response of TFP. By revisiting Sims' (2016) work, we show that Barsky and Sims' (2011) result that TFP rises immediately following a favorable news shock, which is interpreted as a failure to identify a diffusion news, is sensitive: even in Barsky and Sims' identification framework, the identified news shock is found to produce an S-shaped response of TFP, such as the result of Beaudry and Portier (2006). Furthermore, we show that VAR information contents and measurement errors can play important roles in identifying a technological diffusion news. In particular, we document that stock prices convey more valuable information about a diffusion news than consumer confidence and that when identification of news shocks is less affected by measurement error shocks to TFP, the identified news shock is likely to capture a diffusion news.
"Mood Swings and Business Cycles: Evidence from Sign Restrictions," (with Jian Wang), Journal of Money, Credit and Banking 51(6), 1623-1649, 2019.
Abstract: This paper provides new evidence that bouts of optimism and pessimism are an important source of US business cycles, using the identification schemes based on sign restrictions. We document that identified optimism and pessimism shocks account for about 30% of US business-cycle fluctuations in hours and output. In addition, our empirical findings are consistent with the intensive- and extensive-margin adjustments in the US labor market over business cycles, providing further support to optimism shocks being an important source of US business cycles. The identified optimism shocks are at least partially rational as total factor productivity is found to rise 8-12 quarters after an initial bout of optimism. While this later finding is consistent with some previous findings in the news shock literature, we cannot rule out that such episodes reflect self-fulfilling beliefs.
This paper is a substantial revision and replacement of the paper "Do Mood Swings Drive Business Cycles and is it Rational?" by Paul Beaudry, Deokwoo Nam and Jian Wang (2011): NBER Working Paper No. 17651
"Understanding the Effect of Productivity Changes on International Relative Prices: The Role of News Shocks," (with Jian Wang), Pacific Economic Review 23(3), 490-516, 2018.
Abstract: The US real exchange rate and terms of trade have been found to appreciate when its labor productivity increases relative to the rest of the world. This finding is at odds with predictions from standard international macroeconomic models. In this paper, we find that incorporating news shocks to total factor productivity (TFP) in an otherwise standard open-economy sticky-price dynamic stochastic general equilibrium (DSGE) model with variable capital utilization can help the model replicate the above empirical finding. Labor productivity increases in our model after a positive news shock to TFP because of an increase in capital utilization. Under some plausible calibrations, the wealth effect of good news about future productivity can increase domestic demand strongly and induce an increase in home goods prices relative to foreign goods prices.
"The Effects of Surprise and Anticipated Technology Changes on International Relative Prices and Trade," (with Jian Wang), Journal of International Economics 97(1), 162-177, 2015.
Abstract: This paper argues that it is important to distinguish surprise and anticipated components of total factor productivity (TFP) when we study the international transmission of TFP shocks. We document that surprise and anticipated shocks to US TFP induce distinct dynamics for international relative prices (the real exchange rate and the terms of trade) and international trade (real exports, real imports, and the trade balance). Our empirical .findings can reconcile some conflicting empirical results in the literature and hence lead to a better understanding of the international transmission of TFP shocks. In addition, we evaluate a standard international macroeconomic model and discuss the mechanisms that may help to replicate our empirical findings.
"Habit Formation, Asymmetric Price Adjustment, and Real Exchange Rate Persistence," Journal of Economic Research 20, 83-116, 2015.
Abstract: This paper studies the effect of habit formation in consumption on the real exchange persistence under monetary policy shocks. Closed economy models of monetary policy have emphasized the ability of habit formation to generate endogenous persistence, which has encouraged the open economy literature to incorporate habit formation into theoretical models to generate greater persistence in the real exchange rate. However, there has not yet been a thorough evaluation of the habit formation effect in the real exchange rate context. By incorporating habit formation into the model of Benigno (2004), it is shown that the habit formation effect depends on the degree of price stickiness assumed within and across countries as well as the design of the monetary policy rule. Habit formation does not affect the dynamics of the real exchange rate under symmetric price adjustment and does not significantly contribute to the persistence of the real exchange rate for more general cases.
"Are Predictable Improvements in TFP Contractionary or Expansionary: Implications from Sectoral TFP?," (with Jian Wang), Economics Letters 124(2), 171-175, 2014.
Abstract: We investigate the effects of predictable changes in TFP at the sectoral level. Our findings can reconcile the seemingly contradictory findings in the literature. Shocks to predictable changes in investment-sector TFP are also found important for US business cycle fluctuations.
The working paper version is Globalization and Monetary Policy Institute Working Paper No. 114.
"Exchange Rates and Individual Good's Price Misalignment: Evidence of Long-horizon Predictability," (with Wei Dong), Journal of International Money and Finance 32, 611-636, 2013.
Abstract: Although purchasing-power-parity fundamentals, in general, have only weak predictability, currency misalignment may be indicated by price differentials for some individual goods, which could then have predictive power for subsequent re-evaluation of the nominal exchange rate. We collect good-level price data to construct deviations from the law of one price and examine the resulting price-misalignment model's predictive power for the nominal exchange rates between the U.S. dollar and two other currencies: the Japanese yen and the U.K. pound. We find that the slope coefficients and R-squares of in-sample forecasting regressions for almost all goods in our data increase with the forecast horizon for the bilateral exchange rates between the U.S. dollar and the Japanese yen and the U.S. dollar and the U.K. pound. The results of tests for out-of-sample superior predictive ability suggest that our price-misalignment model outperforms a random walk model either with or without drift for the U.S. dollar vis-a-vis the Japanese yen at the 5 percent level of significance over long horizons.
"The Roles of Nominal Exchange Rate and Relative Price Adjustments in PPP Reversion," Journal of Money, Credit and Banking 43(4), 775-785, 2011.
Abstract: This paper investigates the roles of the nominal exchange rate and relative prices in restoring purchasing power parity (PPP) by estimating their dynamics with a bivariate threshold vector error correction model (TVECM). Our empirical results suggest a threshold cointegrating relationship between the nominal exchange rate and relative prices. However, these two variables play different roles in restoring PPP. The nominal exchange rate adjusts to restore PPP only outside the threshold band. Within the band, PPP is restored mainly through adjustments in relative prices.
Working Papers
"An Investigation of Shock-Dependent Exchange Rate Pass-Through in South Korea," with Xiaole Li
Abstract: We examine the shock-dependent exchange rate pass-through in Korea using the structural VAR framework developed by Forbes et al. (2008). Consistent with previous studies, we also find substantial variations in the pass-through effect across different shocks, with each shock significantly contributing to movements in the exchange rate of the Korean won. Our analysis reveals that the characteristics of shock-dependent pass-through in Korea are distinct from those observed in advanced economies such as the UK, Japan, and Canada. Specifically, in Korea, exogenous exchange rate shocks result in the highest pass-through to import prices, while monetary policy shocks produce the most significant pass-through to consumer prices. Additionally, persistent global shocks---interpreted as global supply shocks---induce a counterintuitive pass-through effect, where the depreciation it causes is associated with a fall in import prices.
"International Trade Price Stickiness and Exchange Rate Pass-through in Micro Data: A Case Study on US-China Trade," (with Mina Kim, Jian Wang and Jason Wu), Globalization and Monetary Policy Institute Working Paper No. 135.
Abstract: Price-setting behavior of exporters and exchange rate pass-through (ERPT) are crucial issues in international macroeconomics. This paper studies these topics, using a novel dataset of goods-level US-China trade prices collected by the US Bureau of Labor Statistics. We document that the duration of US-China trade prices has declined almost 30% since China began appreciating its currency in 2005. A benchmark menu cost model that is calibrated to the data can replicate the documented decrease in price stickiness. We also estimate ERPT of RMB appreciation into US import prices between 2005 and 2008. The lifelong ERPT is close to one for prices that have at least one change, while the pass-through is less than half when all goods are included. The di.erence in pass-through rates is a result of about one-third of the goods never experiencing a price change.