RESEARCH
PUBLICATIONS
Off-Track Monetary Policy and Housing - Macroconomic Dynamics (accepted)
- joint with Fredj Jawadi and Philip Rothman
We find significant evidence of model misspecification, in the form of neglected serial correlation, in the econometric model of the U.S. housing market used by Taylor (2007) in his critique of monetary policy following the 2001 recession. When we account for that serial correlation, his model fails to replicate the historical paths of housing starts and house price inflation. Further modifications allow us to capture both the housing boom and the bust. Our results suggest that the counterfactual monetary policy proposed by Taylor (2007) would not have averted the pre-financial crisis collapse in the housing market. Additional analysis implies that the burst of house price inflation during the COVID-19 pandemic was not caused by the deviations from the Taylor rule that occurred during this period.
Global Financial Risk, Equity Returns, and Economic Activity in Emerging Countries - Oxford Bulletin of Economics and Statistics (2024)
[Working paper version] [SSRN link]
- joint with Guanyi Yang
International financial integration exposes countries to external shocks. This paper identifies the impact and transmission of global financial risk (GFR) shocks to emerging market economies (EMEs). Heightened GFR significantly raises EME borrowing costs and lowers equity returns, reducing domestic economic activity. We show that GFR transmits to EMEs via international capital flows. Countries experiencing larger capital inflows are more affected by GFR fluctuations. Exploring the transmission through capital flows, GFR shocks affect EMEs mainly through their effect on equity returns, instead of country spreads. We document that equity returns contain more information about EME macroeconomic fluctuations than sovereign and corporate bond spreads.
Unemployment Dynamics and Informality in Small Open Economies - European Economic Review (2022)
[Working paper version] [SSRN link]
- joint with Guanyi Yang
Despite the typically more pronounced aggregate fluctuations in emerging market economies (EMEs), this paper documents that EMEs exhibit a lower relative volatility and countercyclicality of the unemployment rate than small open advanced economies. We link these differences to the larger informal economy in EMEs. We build a small open economy model that combines a formal sector featuring labor search frictions with a frictionless informal sector. A larger informal sector amplifies the impact of productivity and interest rate shocks on formal output, consumption, and employment, while dampening their impact on unemployment. Varying the degree of informality explains a significant fraction of differences in unemployment dynamics across small open economies.
Oral Interventions in the Foreign Exchange Market: Evidence from Australia - Empirical Economics (2022)
[Working paper version] [SSRN link]
- joint with Yin Germaschewski and Jason (Jiansheng) Zhong
In response to the large fluctuations of the Australian dollar in the beginning of the 21st century, the Reserve Bank of Australia (RBA) started to express a preference for a weaker domestic currency through public speeches and monetary policy statements in order to achieve balanced economic growth. We construct a novel Exchange Rate Stance Index (ERSI) to measure the magnitude of RBA's oral interventions in the foreign exchange market. We employ the ERSI in a structural vector autoregressive model to quantify the impact of RBA's communication on the Australian dollar and overall economic activity. An unanticipated increase in the ERSI leads to a significant weakening of the Australian dollar and considerably stimulates output. The ERSI shocks account for a sizeable fraction of Australia's macroeconomic fluctuations, comparable to the exchange rate shocks. The impact of ERSI on output is largely transmitted through the exchange rate depreciation.
Property Rights, Expropriations, and Business Cycles in China - Journal of Economic Dynamics and Control (2021)
[Working paper version] [SSRN link]
- joint with Yin Germaschewski and Loris Rubini
Real business cycles in China are different than in many other countries, including consumption being more volatile than output and uncorrelated with investment. To study whether Chinese institutions can account for these features, we expand the standard real business cycle model with private and state-owned enterprises facing time-to-build constraints, expropriations, and government expenditures. We introduce shocks to each of these activities and estimate our model with Bayesian techniques. The model matches the salient data moments quite closely, with expropriations playing a central role. In particular, shocks to expropriations account for over 70% of consumption and output volatility, and over 60% of private investment volatility. To assess whether our estimated expropriations are empirically plausible, we show that: (i) the model-generated expropriation series is highly correlated with a commonly used measure of property rights; (ii) the explanatory power of expropriations drops considerably after 2012, coinciding with the government's anti-corruption campaign; and (iii) a placebo test estimating the model for the U.S. finds expropriations to be about an eight of those in China, and to account for only a small share of the U.S. aggregate fluctuations.
Mortgage Spreads, Asset Prices, and Business Cycles in Emerging Countries - Journal of International Money and Finance (2021)
[Working paper version] [SSRN link]
- joint with Philip Rothman
We investigate an unexplored link between the US mortgage spread and business cycle and asset price fluctuations in emerging market economies (EMEs). Controlling for changes in global financial risk, an increase in the US mortgage spread leads to substantially lower EME output, investment, consumption, house and stock prices, and to a contraction in lending by global banks to EMEs. The explanatory power of US mortgage spread shocks for EME macroeconomic fluctuations increases with EME exposure to lending by global banks. This explanatory power is greatly reduced when we turn off the response of EME stock prices to movements in the US mortgage spread in a counterfactual experiment, demonstrating the channel through which US mortgage spread shocks are transmitted to EMEs. The US mortgage spread is a key driver of business and asset price cycles in EMEs when extending the baseline model with additional domestic and foreign variables, and considering alternative country subgroups.
Macroeconomic Disasters and the Equity Premium Puzzle: Are Emerging Countries Riskier? - Journal of Economic Dynamics and Control (2020)
[Working paper version] [SSRN link]
Not necessarily. I provide evidence that advanced countries’ equity premium and consumption growth differ significantly from those of emerging countries. I then estimate distinct disaster risk parameters for these two country groups. My Bayesian analysis demonstrates that in some aspects advanced countries are more exposed to disaster risk, while in others their exposure is smaller. Disasters are estimated to be more severe and uncertain in advanced countries, but are on average less persistent. I show that distinguishing between advanced and emerging countries’ disaster outcomes is important in resolving the equity premium puzzle.
Isolating the Disaster Risk Premium with Equity Options - Journal of Empirical Finance (2019)
[Working paper version] [SSRN link]
The US equity risk premium is approximated with a mean unhedged equity return. I utilize out-of-the-money put options to obtain a hedged equity return, which allows me to quantify the disaster risk premium as the difference between the means of unhedged and hedged equity returns. I demonstrate that a substantial fraction of the U.S. equity risk premium over the period from 1996 to 2016 is attributed to disasters defined as stock price depreciations below a pre-specified strike price. Employing alternative hedging schemes increases the contribution of disasters to the equity risk premium.
Unemployment Dynamics in Emerging Countries: Monetary Policy and External Shocks - Economic Modelling (2019)
[Working paper version] [SSRN link]
- joint with Jason (Jiansheng) Zhong
This paper quantifies the impact of three key external shocks -- external demand, interest rate, and uncertainty shocks -- on emerging market economies (EMEs). We find that external shocks have a sizeable impact on macroeconomic fluctuations in EMEs and that a considerable fraction of this impact is through the domestic stock market. A decrease in external demand and an increase in external interest rate and uncertainty lead to a higher unemployment rate, lower stock market return, and a depreciation of the domestic currency. The EMEs' monetary policy actively responds to external shocks and dampens their impact on domestic activity.
Business Cycles, Informal Economy, and Interest Rates in Emerging Countries - Journal of Macroeconomics (2018)
[Working paper version] [SSRN link]
This paper recognizes the importance of a large informal economy and interest rate fluctuations for business cycles in emerging countries. I document (1) a positive relationship between the relative volatility of consumption to output and the size of the informal economy, and (2) countercyclical interest rates in emerging countries. I show that in a two-sector real business cycle model of a small open economy with a poorly measured informal sector, an increase in country spread generates a contraction in output, consumption, investment, hours, an improvement in trade balance-to-output ratio, and an expansion of informal sector.
WORKING PAPERS
How Important Are Trend Shocks? The Role of the Debt Elasticity of Interest Rate - R&R at Journal of International Economics
- joint with Yin Germaschewski and Loris Rubini
We study how financial frictions affect the importance of trend productivity shocks for macroeconomic fluctuations. Using long-run data from 17 small open economies (SOEs), we compare two variants of a workhorse SOE real business cycle model featuring a debt-elastic interest rate (DEIR), a measure of financial frictions. The first variant estimates the DEIR parameter, while the second fixes it to 0.001, effectively abstracting from financial frictions. On average, ignoring financial frictions more than doubles the contribution of trend shocks to output fluctuations. This suggests that a proper assessment of the quantitative effects of trend shocks requires reasonable DEIR values.
Expropriations and Cross-Country Heterogeneity in Consumption Volatility
- joint with Yin Germaschewski and Loris Rubini
Empirically, the relative volatility of consumption to output decreases with income. The standard small-open economy real business cycle model, however, produces a positive relationship. We can recover the negative relationship when we augment the standard model with micro-founded expropriations and estimate it using Bayesian methods for almost 60 countries. This is because an increase in expropriations reduces investment, freeing up resources for consumption, while moderately lowering output. These effects are more pronounced in poorer countries, where expropriations tend to be larger. Introducing expropriations can also account for the observed cross-country heterogeneity in consumption-related moments better than the standard model, including the persistence and co-movement of consumption with output and investment.
Government Spending Dynamics in Small Open Economies
joint with Raphaelle G. Coulombe
Compared to small open advanced economies (AEs), emerging market economies (EMEs) exhibit simultaneously higher volatility and procyclicality of government spending, two features likely to amplify business cycle fluctuations. To rationalize these stylized facts, we augment the canonical small open economy model with heterogeneous parties and repeated elections with endogenous voting. We relate the distinct dynamics of government spending in EMEs to a combination of larger interest rate fluctuations and a higher degree of political polarization. While, on their own, interest rate shocks and political polarization account, respectively, for about a quarter and two thirds of government spending variance in EMEs, we show that higher political polarization amplifies the macroeconomic effects of interest rate shocks by increasing political turnover. We provide corroborating evidence for this mechanism by documenting that EMEs exhibit, on average, larger political turnover than AEs.
Cross-Country Gender Bias and Corporate Cash Holdings
- joint with Kyre Lahtinen
We document a novel cross-country relationship between gender bias, as portrayed in a country’s folklore, and firms’ corporate cash holdings, while controlling for firm characteristics, country-specific macroeconomic attributes, governance factors, and cultural differences. We show that firms tend to hold significantly less cash in countries with a more pronounced Male Bias, defined as men being portrayed as more violent, physically active, and independent. We provide evidence that these differences can be attributed to countries with a larger Male Bias exhibiting less patience, consistent with the precautionary motive for holding cash. Our findings highlight the value of utilizing folklore data to comprehensively capture the complex and nuanced effects of cultural dimensions on economic and financial behaviors.