Research
Research Interest
International Finance, Multinational Production and Global Value Chain, Macroeconomics
Publications
"Vertical FDI and exchange rates over the business cycle: the welfare implications of openness to FDI." Journal of Development Economics 138 (2019): 274-293. (Working paper version)
Working Papers
Exchange rate regime with multinational production, 2021 (View PDF file)
Multinational production has incorporated much of the developed and developing world into one global production network, in asymmetric ways, where developed countries move labor-intensive manufacturing parts of the production to developing countries, to utilize lower labor cost abroad. Many developing countries have chosen to vigorously engage in MP, while maintaining a “fear of floating”. We wrote down a model that captures patterns of MP across developed and developing countries, and analyze preference over exchange rate regime when nominal wages are sticky. We show that exchange rate stabilization improves welfare when the countries are subject to monetary shocks, or demand shocks. This is because stable nominal exchange rate suppresses the gap between real wages across countries, and therefore induces more stable employments over the business cycle. This is an opposite force to Friedman's argument for flexible exchange rate. Multinational production intensifies the need to stabilize.
The role of exchange rate in monetary policy rules: A welfare-based re-examination, 2021 (View PDF file)
Should monetary policy rule stabilize the exchange rate? In contrast to the conclusion from the optimal open-economy monetary policy literature, this papers show analytically, in a standard two-country new Keynesian model, that under monetary shocks and UIP shocks, stabilizing exchange rate in addition to standard inflation targeting can be welfare-improving. Thus, desirability of exchange rate stabilization critically depends on the relative magnitude of nominal and financial shocks, compared with those of demand shocks. Our quantitative analysis shows that exchange rate stabilization improves welfare at low values of exchange rate targeting strength, but too strong a response reverses the effect. The potential welfare gain from optimal exchange rate stabilization is sizable, but international cooperation in the sense of mutual willingness to stabilize the exchange rate is required to fully reap the gain.
Exchange rate forecast with dynamic factor models: Connecting the exchange rate and macroeconomic fundamentals, with Yeda Du, 2020 (View PDF file)
Exchange rate is one of the most important asset prices and numerous previous attempts to forecast the exchange rate based on macroeconomic fundamentals has only limited success, casting doubts on the validity of theories of exchange rates. We use a dynamic factor model-based approach to forecast the USD/EUR exchange rate, and decompose impacts of macro fundamentals on exchange rate fluctuations. We find that dynamic factor model forecasts better than any previous models, especially at shorter training horizons, and information contained in financial market variables do no marginally improve the forecastability. Through decomposition of impacts, we find that inflation difference is the most important driver of exchange rate movements.
Buying at discount or flying to safety - the effect of exchange rate on cross-border mergers and acquisitions, with Tianhong Zhang, 2017
The proportion of cross-border mergers and acquisitions (M&A) in total M&A globally has experienced a rapid increase after the global financial crisis, and stands at 35% in 2016. Its total size has surpassed green-field investments in 2016 for the first time, making it the most important channel of cross-border direct investment. Previous literature has pointed out that exchange rate appreciation promotes outward cross-border M&A via the valuation effect. We show that exchange rate expectation, and the "flight to safety" effect may be a more important factor behind cross-border M&A. We find that adding exchange rate expectation to the otherwise-standard regression equation nullify the effects of exchange rate. Instead, exchange rate depreciation expectation drives outward M&A. We verify our channel by showing that the aforementioned effect is stronger for countries with controlled exchange rate regimes.