Cutting the interest rate could be a bad idea already in a low-interest-rate environment, as it can discourage risk-taking. In the aggregate, we can have a humped IS curve and an optimal level of interest rate. The optimal rate depends on credit limits and correlations among risky projects.
Government Bond Liquidity and Sovereign-Bank Interlinkages [paper] (with Sören Radde and Cristina Checherita-Westphal), SFB working paper
Sovereign insolvency reduces the liquidity of sovereign bonds in the search market. Banks fly to liquidity, and some investment will not be financed. Then, output drops and the tax base will shrink which further amplifies the insolvency issue.
Estimation of NAIRU with Inflation Expectation Data [paper], joint with Wolfgang Hardle and Weining Wang
Two Engines, One Boom: Disentangling Credit's Real Effects: A Discussion of “Quantifying the Macroeconomic Impact of Credit Expansions”, 2025, International Economic Review, [paper]
The paper shows that taxing sudden capital income jumps can be efficient and redistribution-friendly. It can be implemented by taxing revenues (not profits) above a certain level and/or capital gains tax for gains above a certain threshold. We show that it is better than taxing all-components capital income.
The paper shows that taxing sudden capital income jumps can be efficient and redistribution-friendly. It can be implemented by taxing revenues (not profits) above a certain level and/or capital gains tax for gains above a certain threshold. We show that it is better than taxing all-components capital income.
Capital Income Jumps and Wealth Distribution [paper] (with Jess Benhabib and Jianjun Miao), 2024, Quantitative Economics
Wealth accumulation at the very top is now increasingly relying on entrepreneurship. When capital income has jump risks, we build a tractable incomplete market model that can match the wealth distribution in the US, including the top 1% and top 0.1%. We show that the wealth tail can be thicker under some conditions than the income tail.
Endogenous Liquidity and Capital Reallocation [paper] [replication data], (with Randall Wright and Yu Zhu), 2025, Journal of Political Economy
The paper documents new long-run / short-run reallocation and cost of liquidity features. It provides a tractable search type of quantitative model. We highlight the importance of search and liquidity in determining the types of reallocation, i.e., acquisition and partial sells. A new reallocation trade off faced by monetary policy makers.
A Ramsey Theory of Financial Distortions [published version] [working paper version] [replication data] (with Marco Bassetto), 2024, Journal of Political Economy
When financing constraints are tied to asset liquidity frictions, capital tax can be used together with low interest rates.
Macroeconomic Effects of Delayed Capital Liquidation [paper], 2022, Journal of the European Economic Association
Why in the aggregate do firms reallocate fewer real assets in recessions, and why is the fall of reallocation stronger than new investment? I build a model in which liquidation costs generate an option value of staying for unproductive firms, and I show adverse financial shocks can raise the option value and delay capital liquidation. A novel feature coming out of the interaction between the option value and external financial conditions is that unproductive firms are borrowing constrained and have higher debt-to-asset ratios.
previous version: Delayed Capital Reallocation [paper]
Quantitative Easing with Heterogenous Agents [paper] [code](with Vincent Sterk), 2021, Journal of Monetary Economics
VoxEU column: https://voxeu.org/article/powers-and-pitfalls-quantitative-easing
A tractable heterogenous-agent model for evaluating the effect of quantitative easing (i.e., deposit creation arising from swapping reserves and long-term government debt). We compare interest policy rules and quantitative easing rules, and estimate the contribution of QE during the Great Recession. Although QE is effective during the recession, there are substantial side effects of QE through adversely affecting the wealth distribution.
This paper develops a tractable macroeconomic model in which persistent default cycles are the outcome of variations in self-fulfilling sunspot beliefs about credit market conditions. The interest spread and the leverage are determined in optimal debt contracts that reflect the expected default risks (including belief risks) of borrowing firms. The belief risks affect both the long run and the business cycle as the model features risky steady states. We show that financial shocks, generated from belief variations and other fundamental reasons, can account about 45% of the variation of U.S. output growth.
Search-based Endogenous Asset Liquidity and the Macroeconomy [paper] (with Sören Radde) , 2019, Journal of the European Economic Association
A macro model of procyclical asset liquidity and asset price through costly search. Government-issued assets have low returns because of a liquidity premium. The paper demonstrates how financial matching service for investment significantly affects asset liquidity, investment, and total factor productivity.
The FTPL is not a robust equilibrium selection criterion when the interest rate is persistently below the growth rate of the economy: whether the theory does or does not hold depends on the specific economic forces that lead to low rates. In this paper, we have shown three broad classes of models in which government bonds feature low returns: risks, dynamic inefficiency, and liquidity
Monetary-fiscal Interactions with Endogenous Liquidity Frictions [paper], lead article, European Economic Review, 2016
A competitive asset search framework to endogenize asset liquidity and financing constraints, which is suitable for monetary-fiscal policy analysis. I argue for expansionary fiscal contraction in response to financial shocks
A competitive asset search framework to endogenize asset liquidity and financing constraints. We show the possibility of multiple equilibria and the macro-financial system linkages.