Working Papers

  • "Optimal Central Bank Forward Guidance" (Job Market Paper) (Updated Draft Coming Soon)

Over the past two decades, central banks have been using verbal communication about their economic forecasts and future policy choices as a tool of monetary policy. There has been much study of the optimal interest rate policy for central banks, but not on the optimal communication policy. This paper answers a fundamental question: What is the optimal communication strategy about its prediction for the future state of the economy for central banks under full commitment? I address this question using the tools of Bayesian persuasion. I obtain three results. First of all, for a dovish central bank, which is willing to accept high inflation to lower unemployment, if a priori it is less likely to observe a signal for future economic weakness, the communication should be overly pessimistic about its prediction for the future state of the economy. Second, for a dovish central bank, if a priori it is more likely to observe a signal for future economic weakness, then the communication should be uninformative. Third, for a hawkish central bank, which is not willing to accept much inflation irrespective of the unemployment level, the optimal communication strategy is uninformative. In preliminary empirical work using data from June 1999 to June 2006, I show that the Federal Open Market Committee’s forward guidance strategy deviates materially from these benchmark policy prescriptions.

Can a dynamic oligopoly model with persistent asymmetric information have a theoretically derived yet computationally tractable stationary equilibrium? I consider a class of dynamic Bayesian games where players are allowed to have asymmetric information about the state of the world, which are captured by players' types. Types evolve stochastically according to a first-order Markov process over time. Players take actions based on their belief about the state of the world, which is determined by their current type and common prior. The actions, as well as players' current types in the corresponding period, are revealed when the payoffs are realized. That is, actions are perfectly monitored, while the types are revealed with delay. In this environment, I show that there exists a stationary Bayesian Markov equilibrium where a player's strategy maps the same tuple of the previous type profile, the previous action profile, and the player's current type to the same current mixed action. The type revelation ensures that the dimension of the support of a player's beliefs has an upper bound so that the computation of equilibrium analysis is tractable. This framework and the equilibrium concept can be applied to the analysis of dynamic oligopolies with persistent asymmetric information, and to the analysis of the dynamic relationship of a central bank with the private sector when the central bank has persistent private information on the state of the economy, among many other applications. I offer a dynamic duopoly example that analyzes equilibrium pricing and R&D investment strategies of two pharmaceutical companies when their consumer bases are asymmetric information, and there is an innovation race between them to colonize the other's consumer base.

Research Statement

(Draft Coming Soon)

Work In Progress

  • “Rules versus Discretion: a Reconsideration with Periodic Revelation” (joint with Narayana Kocherlakota)

Journal Publications

(Media coverage (in Korean): Economy Insight , September 1, 2011. Print and Online.)

This paper examines the changes in relative wages of top 10 college graduates to the other college graduates among the age group of 26-28 years using the Korean Labor and Income Panel Study (KLIPS). From 1999 to 2008, the wage differential between top 10 college graduates and the other college graduates increased in South Korea. This wage differential seems to persist along with their age. Within industry wage differential among college graduates also rose but in the late 2000s, it became smaller than the wage differential within firm size and industry. Increase in elite college wage premium has led to recent changes in college wage premium.