Research

Quantitative Easing, Collateral Constraints, and Financial Spillovers with John Geanakoplos [American Economic Journal, Macroeconomics, Vol. 12, No. 4, October 2020]

The steady application of Quantitative Easing (QE) has been followed by big and non-monotonic effects on international asset prices and capital flows. We rationalize these observations in a model in which a central bank buys domestic assets that serve as the best collateral for investors worldwide. The crucial insight is that domestic private agents adjust their portfolios of domestic and foreign assets in different ways to offset QE, conditional on whether they are (i) fully leveraged, (ii) partially leveraged or (iii) unleveraged. These portfolio shifts can diminish or even reverse the impact of ever-larger QE interventions on asset prices.

Central Bank Balance Sheet Policies and Spillovers to Emerging Markets with Manmohan Singh [IMF Working Paper No. 17/172]

We develop a theoretical model that shows that in the near future, the monetary policies of some key central banks in advanced economies (AEs) will have two dimensions—changes in short-term policy rates and balance sheet adjustments. This will affect emerging market economies (EMs), especially those with a pegged exchange rate, as these EMs primarily use a single monetary policy tool, i.e., the short-term policy rate. We show that changes in policy rates and balance sheet adjustments in AEs may differ in their respective financial spillovers to pegged EMs. Thus, it will be difficult for EMs to mitigate different types of spillovers with a single monetary policy tool. In that context, we use the model to show how EMs might use additional tools—capital controls and/or macro-prudential policy—to complement their monetary policy and financial stability toolkit. We also discuss how balance sheet adjustments that affect long-term interest rates may percolate to influence short-term interest rates via financial plumbing.

Market Sensitivity to Global Financial Cycle: International Evidence and Implication for China's Capital Account Liberalization [Earlier Version. (New Version Coming Soon)]

Global financial integration led to increasing co-movement across different cross-border capital flows and asset prices, the so-called “global financial cycle”. China however, has been relatively insulated from the global financial cycle, partly due to existing restrictions on its capital account. In this paper, I investigate potential determinants of market sensitivity (for both stock market and currency market) to the global financial cycle, and study its implications for China's move toward capital account liberalization. I show that there is an important distinction between cross-sectional and inter-temporal determinants of market sensitivity. The empirical findings also point to the presence of non-linearity in global risk aversion, as represented by the “VIX”, in explaining global asset prices. Somewhat counter-intuitively, I demonstrate through an empirical exercise that greater sensitivity to the global financial cycle would actually imply lower market volatility in China. This suggests that greater exposure to the global market may not necessarily contribute to higher market volatility in China.

Work in Progress

``US-China Trade Tension: Evidence from the Stock Market" with Hui Tong, 2018

Abstract: How is the US-China trade war affecting stock markets? To shed light on this issue, we analyze the impact of major trade events in 2018 on stocks in tradable sectors in the U.S. and China. In the U.S., stock returns are smaller for US sectors exporting to China or importing from China, particularly for those importing processing goods from China. In China, stock returns are smaller for Chinese sectors exporting to the US, particularly for those exporting processing goods to the US. Results thus suggest that the trade war is particularly detrimental for trade in the processing sector. There may also be distributional effects of trade tensions on firm behavior, such as capital expenditure.

``Stock Market Spillovers through the Uncertainty Channel" with Hui Tong, 2018

Abstract: In this paper, we examine how the U.S. stock market shocks in early February 2018 spilled over to the global markets through the uncertainty channel. We first construct an intrinsic sector-level uncertainty sensitivity index at the 3-digit SIC level. Then, using stock price data for 28,000 firms across 75 countries, we find that firms in sectors more sensitive to market uncertainty experience larger stock declines in response to uncertainty shocks, particularly in countries with larger foreign equity inflows. The economic magnitude is large for the uncertainty channel, with one standard deviation increase in sectoral uncertainty-sensitivity associated with an additional 0.4% decline in abnormal stock returns. The results carry through after we control for other channels such as the bubble channel and the interest rate channel.

``Returns of the External Wealth of Nations", with Mitali Das, Chuan Li, and Mauricio Vargas, 2018