Research

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.

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.

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.

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.

When financing constraints are tied to asset liquidity frictions, capital tax can be used together with low interest rates.

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]

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.

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

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.