Yin Germaschewski

Research

Publications

1. "How Important are Trend Shocks? The Role of the Debt Elasticity of Interest Rate". Joint with Jay Horvath and Loris Rubini. Journal of International Economics 152, 103990, 2024.

Abstract: We study how financial frictions affect the importance of trend productivity shocks for macroeconomic fluctuations. Using long-run data from 17 small open economies (SOEs), we compare two variants of a workhorse SOE real business cycle model featuring a debt-elastic interest rate (DEIR), a measure of financial frictions. The first variant estimates the DEIR parameter, while the second fixes it to 0.001, effectively abstracting from financial frictions. On average, ignoring financial frictions doubles the contribution of trend shocks to output fluctuations. This suggests that a proper assessment of the quantitative effects of trend shocks requires reasonable DEIR values.

2. "House Price Volatility in China: Demand versus Supply". Economic Inquiry 61(1), 2023.

Abstract: This paper studies the transmission mechanisms that underlie China's house price fluctuations using a dynamic stochastic general equilibrium model. Several distinctive features of the Chinese economy are included. The model is estimated with Bayesian methods. The estimated model accounts well for business cycle properties of the housing market. The results show that shocks to housing productivity and the government land supply to housing developers are the primary contributors to house price volatility, accounting for 37% of the volatility in house prices in the short run and 32% in the long run, respectively. The importance of housing valuation shocks and shocks to migration only increases in models without the supply side of the housing market, each contributing over 45% of house price volatility.

3. "House Price, Credit Supply, and Government Policy in China". Canadian Journal of Economics, Volume 55 (2), 2022. 

[Working paper]

Abstract:  House prices in China have risen rapidly since 2000, accompanied by loose lending conditions and rapid credit expansion. This paper compares the stabilization effects and welfare implications of five policies on China's housing and credit markets. Three policies directly target the housing and credit markets: bank capital requirements, loan-to-value regulation, and a property tax rule. Two broader policies are also considered: the reduction of capital controls and of the nominal exchange rate peg. To quantify the analysis, three prominent features of the Chinese economy - a monopolistically competitive banking sector that is subject to direct government control, a nominal exchange rate peg, and capital controls - are built into a New Keynesian dynamic stochastic general equilibrium model. The model is estimated with Bayesian methods using Chinese data for the period 1998Q1 - 2017Q4. Results show that relaxing capital controls is the most effective policy for stabilizing the credit market and the overall economy, while improving welfare. The second most effective approach is bank capital requirements, followed by a property tax rule. In contrast, loan-to-value regulation and a relaxation of the nominal exchange rate peg result in welfare losses to the economy.

4. "Fiscal Stabilization in High Debt Economies without Monetary Independence" (Joint with Shu-Ling Wang). Journal of Macroeconomics, Volume 72, 103398, 2022.  

Abstract: Fiscal stabilization without independent monetary policy can be difficult, especially in countries with high public debt. This paper studies the effects of fiscal stabilization policy in Greece, a highly-indebted economy that belongs to a monetary union. We introduce rich fiscal policy instruments to a small open economy model and estimate it using Bayesian methods. The welfare maximizing stabilization policy feature a simultaneous adjustment of spendings and taxes. In response to rising public debt, the optimal response is to expand public employment, raise consumption, labor, and capital tax rates, while reducing government consumption and investment spendings.

5. "Oral Interventions in the Foreign Exchange Market: Evidence from Australia" (Joint with Jay Horvath and Jiansheng Zhong). Empirical Economics 62, 2022.

[Working paper]

Abstract: We construct a novel Exchange Rate Stance Index (ERSI) to measure the magnitude of oral interventions that talk down the Australian dollar - a preference for a weaker domestic currency expressed by the Reserve Bank of Australia (RBA) through public speeches and monetary policy statements in order to achieve balanced economic growth. We then employ the ERSI in a structural vector autoregressive model to quantify the impact of the RBA's communication on the Australian dollar and overall economic activity. The estimation shows that an unanticipated increase in the ERSI leads to a significant weakening of the Australian dollar and considerably stimulate output. We demonstrate that the transmission of ERSI's impact on output occurs largely through the exchange rate depreciation, and that the contribution of ERSI shocks to Australia's macroeconomic fluctuations is sizable and similar to the exchange rate shocks.  

6. "Property Rights, Expropriations, and Business Cycles in China" (Joint with Jay Horvath and Loris Rubini). Journal of Economic Dynamics and Control, Volume 125, 2021.

[Working paper]

Abstract:  Real business cycles in China are different than in many other countries, including consumption being more volatile than output and uncorrelated with investment. To study whether Chinese institutions can account for these features, we expand the standard real business cycle model with private and state-owned enterprises facing time-to-build constraints, expropriations, and government expenditures. We introduce shocks to each of these activities and estimate our model with Bayesian techniques. The model matches the salient data moments quite closely, with expropriations playing a central role. In particular, shocks to expropriations account for over 70% of consumption and output volatility, and over 60% of private investment volatility. To assess whether our estimated expropriations are empirically plausible, we show that: (i) the model-generated expropriation series is highly correlated with a commonly used measure of property rights; (ii) the explanatory power of expropriations drops considerably after 2012, coinciding with the government's anti-corruption campaign; and (iii) a placebo test estimating the model for the U.S. finds expropriations to be about one eighth of those in China, and to account for only a small share of the U.S. aggregate fluctuations.

7. "The Distributional Effects of Non-Resident Investors on Housing Market and Welfare" (Joint with Shu-Ling Wang). Review of International Economics, Volume 29 (5), 2021, page 1300 - 1326.

[Working paper]

Abstract: This paper studies the distributional effects of non-resident housing investment on residents' consumption and welfare in a two-sector dynamic stochastic general equilibrium model with two types of agents: borrowers and savers. The model is estimated using Bayesian methods applied to Taiwanese quarterly data from 2001Q1 to 2017Q4. Three main results emerge. First, in line with empirical evidence, non-resident housing investment raises house prices and rent, validating policymakers' concerns about housing affordability. Second, higher house prices boost homeowners' property values, generating a positive wealth effect which strongly promotes consumption. The housing production boom increases wages, further spurring consumption. Third, higher investment by non-residents increases government tax revenues, the allocation of which has important welfare consequences. Using tax revenues to subsidize residents through income tax reduction greatly improves both overall welfare and welfare for borrowers, followed by a provision of public goods. Increasing the tax deductibility of mortgage interest is beneficial for borrowers, while allotting tax revenues to supply public capital results in the greatest welfare losses to savers. Monetary policy that leans against house prices and rent further strengthens the stabilization effects of fiscal policy on the housing and financial markets.

8. "Stabilization Policy, Infrastructure Investment, and Welfare in a Small Open Economy". Economic Modelling, Volume 84, 2020, page: 322 - 339.

[Working paper]

Abstract: This paper studies a joint monetary and fiscal policy response to an increase in public infrastructure investment in emerging market economies. I extend the neoclassical growth model to a two-sector open economy setting, and introduce heterogeneous agents to examine the distributional effects of public investment on welfare. My results show that the effects of public infrastructure investment hinge crucially on how the increases in government spending are ultimately financed. Monetary policy without fiscal adjustment for financing infrastructure expansion is inflationary, and has sizable crowding-out effects on private consumption and investment over shorter horizons. Fiscal stabilization policy is critical for the sustainability of rising government spending and price stability. With the joint effort of monetary and fiscal policy, infrastructure investment brings in significant welfare gains to the economy. Public investment has major distributional effects across agents, and the choice of fiscal instruments matters both quantitatively and qualitatively. Saving households accrue the highest welfare gains as a result of new bond issuance, while hand-to-mouth consumers are better off when non-distorting taxes are adjusted.

9. "Getting Help from Abroad: The Macroeconomics of Foreign Direct Investment in Infrastructure in Low-Income Countries". Canadian Journal of Economics, Volume 49 (4), 2016, page: 1502-1535.

[Working paper]

Abstract:  Infrastructure financing needs in most low-income countries are substantial, but funding for such needs is only partly covered by national governments and aid donors. This paper introduces foreign direct investment (FDI) through public-private partnerships as a source of infrastructure financing in low-income countries. A two-sector open economy model is developed to assess the macroeconomic performance of FDI in infrastructure. With efficient foreign investment, an increase in revenue-generating infrastructure investment boosts productivity and spurs private investment while stabilizing domestic prices. A direct comparison between infrastructure financed by domestic versus foreign investment shows that foreign investment creates higher output growth and welfare gains, and is preferable to domestically-sourced investment, irrespective of the underlying financing instrument the domestic economy is employing. FDI in non-revenue-generating infrastructure is also analyzed and discussed.

10. "Reserve Financing and Government Infrastructure Investment: An Application to China". Journal of Policy Modeling, Volume 35 (6), 2013, page: 992-1013. 

Abstract: This paper proposes a novel financing scheme, reserve financing, for government infrastructure investment in China. A two-sector open economy model explores the consequences and policy implications of a surge in infrastructure investment financed by international reserves. The results show that reserve financing, coupled with a managed float exchange rate system, can maintain the country's fast growth rate while mitigating fiscal pressure on local governments. Productive infrastructure capital stimulates domestic demand, reducing the country's dependence on exports. To promote growth and maintain price stability, three factors are critical: return on infrastructure, swift fiscal adjustment, and rapid infrastructure financing.

Working Papers

1. "Expropriations and Cross-Country Heterogeneity in Consumption Volatility". Joint with Jay Horvath and Loris Rubini

Abstract: The relative volatility of consumption to output decreases with income per capita in the data. A workhorse small open economy real business cycle (RBC) model featuring financial frictions fails to produce this relationship. We can recover the negative relationship when we introduce micro-founded expropriations to the RBC model and estimate it using Bayesian methods for over 50 countries. This is because an increase in expropriations reduces investment, freeing up resources for consumption, while moderately lowering output.  These effects are more pronounced in poorer countries, where expropriations are generally larger. Introducing expropriations can also account for the observed cross-country heterogeneity in consumption-related moments better than the RBC model, including the persistence and co-movement of consumption with output and investment.

Teaching

Undergraduate Courses:

International Economics

This is an upper level undergraduate course. Syllabus and course related materials can be found at myCourses by Canvas. 

Principles of Economics (Macro) -- Honors Section

Syllabus and course related materials can be found at myCourses by Canvas. 

Principles of Economics (Macro)

Syllabus and course related materials can be found at myCourses by Canvas. 

Principles of Economics (Micro)

Syllabus and course related materials can be found at myCourses by Canvas. 

Graduate Courses:

Open Economy Macroeconomics

This is the 2nd year graduate-level field course in macroeconomics. Syllabus and course related materials can be found at myCourses by Canvas. 

Econometrics III -- Time Series

This is the 2nd year graduate-level course in Econometrics. Syllabus and course related materials can be found at myCourses by Canvas.