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.

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.

    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.
    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.
    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
    Abstract: Using the VAR framework augmented with the Survey of Professional Forecasters series, we examine the macroeconomic effects of anticipated government spending expansions. During the post-1981 sample period, we find that an anticipated government spending expansion, which is quite persistent, leads to increases in consumption, investment, and real wages as well as increases in output and hours. Furthermore, the anticipated government spending expansion is associated with the tax cut policy, but not with the accommodative monetary policy. It also features the increase in government investment relative to government consumption, which induces a delayed increase in private sector productivity. These findings are in sharp contrast to those in Ramey (2011) and Ben Zeev and Pappa (2017). Based on the integral multiplier approach, we also find that government spending multipliers at the first three-year horizons are bigger than unity, but at subsequent horizons become close to unity.
    Abstract: Following Sims (2016), I reexamine to what extent the vintage of Fernald's (2014) quarterly adjusted TFP series matters in identifying news shocks to TFP and revisit the findings on news shocks in Barsky and Sims (2011). In contrast to Sims (2016), I document that in some identification specifications the results on news shocks are homogeneous across different vintages of the adjusted TFP series, lending support to the news-driven business cycle hypothesis. It suggests that the vintage of the adjusted TFP series is not as much important in empirical work on news shocks as noticed by Sims (2016) and the .findings on news shocks in Barsky and Sims (2011) is not as much robust. Moreover, I explore further why empirical results on news shocks can differ and discuss key issues related to identification of news shocks.
    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.