Working Papers
Production of Private Safe Assets and Macroprudential Policy (Job Market Paper)
I study the macroprudential policy tradeoff between the benefit and the risk associated with the production of private safe assets when the economy has a shortage of safe assets. The bank issues private safe assets against risky projects whose return is subject to aggregate risk. Entrepreneurs demand private safe assets as a store of value. A shortage of safe assets lowers the return of safe assets, hinders their function as a store of value, and leads to a reduction in the entrepreneurs' wealth and output. In response to a shortage of safe assets, the bank produces more private safe assets and promotes output. However, producing more private safe assets exposes the bank to more aggregate risk. Macroprudential policies can adjust the production of private safe assets with a tradeoff: encouraging the production of private safe assets alleviates the shortage of safe assets and improves output, at the cost of a more volatile economy.
Monetary Policy and Rational Asset Bubbles: Comments (with Jianjun Miao and Pengfei Wang) American Economic Review, (2019)
We revisit Gali’s (2014) analysis by extending his model to incorporate persistent bubble shocks. We find that, under adaptive learning, a stable bubbly steady state and the associated sunspot solutions under optimal monetary policy are not E-stable. When deriving the unique forward-looking minimum stable variable (MSV) solution around an unstable bubbly steady state, we obtain results that are consistent with the conventional views: leaning-against-the-wind policy reduces bubble volatility and is optimal. Such a steady state and the associated MSV solution are E-stable.
Leverage of Financial Intermediaries in the Crisis
Shadow banks deleveraged while commercial banks increased their leverage during the 2007- 2008 financial crisis. This contrasting leverage pattern can be explained by the different funding sources of shadow banks and commercial banks. Banks who relied more on short-term funding tended to deleverage more during the crisis. I then build a model to incorporate both shadow banks and commercial banks with different leverage determination mechanism. The leverage of shadow banks is determined by a Value-at-risk rule while the leverage of commercial banks is determined by the agency friction between bankers and depositors. The model can explain the leverage dynamics of the banking sector and the flight-to-quality phenomenon observed in data.
Work in Progress
“Bubbles and Interbank Borrowing” (joint with Dongling Su)
Banks use safe assets as collaterals for interbank borrowing. Bubbles can emerge as a substitution when the economy is short of safe assets.
“Platform Ecosystems, FinTech, and Data” (joint with Zhou Zhou)
Platforms have more room to use fintech to promote financial inclusion and entrepreneurship in their ecosystems when the banking system is less efficient.