“This is a Mickey Mouse example, but don’t underestimate the power of Mickey Mouse.” -- Nobu Kiyotaki
Publications
Publications
with Emre Ozdenoren and Kathy Yuan. Review of Economic Studies, 2023. (paper)
A dynamic loop of low collateral asset price, severe adverse selection, and low funding causes financial fragility. Optimally designed asset-backed securities as repo contracts eliminate it.
with Ricardo Lagos. Econometrica, 2022. (paper, presentation recording)
Even if fiat money is not used, it disciplines the market power of private payment systems.
with Andrew Ellis and Michele Piccione. Theoretical Economics, 2022. (paper, supplementary appendix)
Investors' disagreement over the correlation of asset payoffs can motivate profit-maximizing intermediaries to pool the assets and tranch the asset pool.
with Ricardo Lagos, American Economic Review, 2020. (paper)
Tightened monetary policy reduces turnover liquidity and the speculative premium in the asset price.
with Ricardo Lagos, special issue of the Review of Economic Dynamics on fragmented markets, 2019. (paper)
We develop a model of monetary exchange in bilateral over-the-counter markets to study the effects of monetary policy on asset prices and financial liquidity. The theory predicts asset prices carry a speculative premium that reflects the asset's marketability and depends on monetary policy and the market microstructure where it is traded. These liquidity considerations imply a positive correlation between the real yield on stocks and the nominal yield on Treasury bonds—an empirical observation long regarded anomalous.
with Mark Roberts, Daniel Xu, and Xiaoyan Fan, Review of Economic Studies, 2017. (paper)
In this article, we use micro data on both trade and production for a sample of large Chinese manufacturing firms in the footwear industry from 2002 to 2006 to estimate an empirical model of export demand, pricing, and market participation by destination market. We use the model to construct indexes of firm-level demand, marginal cost, and fixed cost. The empirical results indicate substantial firm heterogeneity in all three dimension with demand being the most dispersed. The firm-specific demand and marginal cost components account for over 30% of market share variation, 40% of sales variation, and over 50% of price variation among exporters. The fixed cost index is the primary factor explaining differences in the pattern of destination markets across firms. The estimates are used to analyse the supply reallocation following the removal of the quota on Chinese footwear exports to the EU. This led to a rapid restructuring of export supply sources on both the intensive and extensive margins in favour of firms with high demand and low fixed costs indexes, with marginal cost differences not being important.
To understand the illiquidity of the over-the-counter market when dealers and traders are in long-term relationships, I develop a framework to study the endogenous liquidity distortions resulting from the profit-maximizing, screening behavior of dealers. The dealer offers the trading mechanism contingent on the aggregate history of his customers summarized by the asset allocation. The equilibrium distortion is type dependent: trade with small surplus breaks down; trade with intermediate surplus may be delayed; trade with large surplus is carried out with a large bid/ask spread but without delay. Because of dealers' limited commitment, the distortions become more severe when the valuation shock is frequent, the valuation dispersion is large or the matching friction to form new relationships is large. Calibrating the model and running a horse race between matching efficiency, trading speed and relationship stability, I found that the liquidity disruption in the market during the recent financial crisis is more consistent with declining matching efficiency of forming trading relationships. The optimal mechanism can be implemented by random quote posting.
with David Andolfatto and Fernando Martin, European Economic Review, 2017. (paper)
We develop a dynamic general equilibrium monetary model where a shortage of collateral and incomplete markets motivate the formation of credit relationships and the rehypothecation of assets. Rehypothecation improves resource allocation because it permits liquidity to flow where it is most needed. The liquidity benefits associated with rehypothecation are shown to be more important in high-inflation (high-interest rate) regimes. Regulations restricting the practice are shown to have very different consequences depending on how they are designed. Assigning collateral to segregated accounts, as prescribed in the Dodd–Frank Act, is generally welfare-reducing. In contrast, an SEC15c3-3 type regulation can improve welfare through the regulatory premium it confers on cash holdings, which are inefficiently low when interest rates and inflation are high.
with David Kohn, Emiliano Luttini, and Michal Szkup. R&R at Journal of International Economics Special Issue on "Dynamic Quantitative Trade". (paper)
with Jonathan Chiu, Thorston Koeppl, and Hanna Yu.
with Bin Wang and Chunyang Fu
with Ricardo Lagos. (paper appendix)
with Ricardo Lagos. (paper slides)
with Briana Chang. (paper) Revise and Resubmit at Journal of Economic Theory
with Briana Chang. (paper)
with Nobuhiro Kiyotaki and John Moore. Previously titled "Credit Horizons", CICM Best Paper Award. (paper, slides, presentation recording)
with Nobuhiro Kiyotaki and John Moore.
with Nobuhiro Kiyotaki. (paper)
with Jonathan Chiu, Emre Ozdenoren, and Kathy Yuan. (paper)
with Sichuang Xu.
with Neng Wang, and Jinqiang Yang.
with Kaiji Chen, and Yu Yi
with Yu Yi, and Gang Zhang
with Emre Ozdenoren and Kathy Yuan . (paper)
with Stephan Imhof and Cyril Monnet (paper)