Research

Publication

• Bu, Chunya, John Rogers, and Wenbin Wu (2021). "A Unified Measure of Fed Monetary Policy Shocks " . Journal of Monetary Economics, 118, 331-349.     [Data: BRW Shock Series]

Abstract: We develop a U.S. monetary policy shock series that stably bridges periods of conventional and unconventional policymaking, is largely unpredictable, and contains no significant central bank information effect. We attribute differences between our measure and often-used alternatives to our econometric procedure, a partial least squares approach, and our using the full maturity spectrum of interest rates in estimating the shock. We find that shocks to our monetary policy series have particularly large effects on maturities in the middle of the term structure and produce conventionally-signed impulse responses of output and inflation.

Working Papers

• Bu, Chunya (2024). "Business Cycle Accounting with Goods and Capital Market (Dis)Integration".

Abstract: I incorporate aggregate uncertainty into an open-economy neoclassical growth model with time-varying wedges in goods and capital markets to assess the fraction of various fluctuations trade and financial frictions account for. Underlying frictions are estimated from gross goods and capital flow data. The model reveals fluctuations in trade and financial frictions among the U.S., China, and the rest of the world over the last 25 years of globalization.

• Bu, Chunya (2024). "Firm Default Risks and Exchange Rate Puzzles".  

Abstract: I incorporate micro-founded financial frictions from endogenous firm default choice into an open-economy model to deliver realistic exchange rates patterns. In a twocountry model with productivity shocks, firms finance investment via issuing bonds subject to default risks. Households share risks through a portfolio choice of home and foreign corporate bonds. Exchange rate paths depend on default risk premium as bond returns are risky and households are risk-averse. A positive home productivity shock dampens home default risk premium more than that of foreign. Home currency then appreciates to achieve an interest-rate parity between home and foreign creditors. On the other hand, consumption differentials rise because of the incomplete asset market. Taking together, the model is able to reconcile the Backus-Smith puzzle (Backus & Smith 1993) depending on the degree of financial frictions.  

The underlying mechanism lies in the adjustment of household's foreign asset positions. In response to a domestic positive shock, home default risks drop so that foreign households increase home bond holdings for the hedging motive. The excess foreign demand appreciates the home currency.  

I calibrate the degree of financial frictions with bond-level data. Specifically, I derive a measure of financial frictions from the micro-foundation, defined as the relative default risk premium between home and foreign households, and estimate it from the spreads differentials of corporate bonds denominated in different currencies. I use its empirical volatility to discipline the model. The quantitative results reconcile the Backus-Smith puzzle and improve the exchange rate volatility puzzle.

• Bu, Chunya, John Rogers, and Wenbin Wu (2020). "Forward-Looking Monetary Policy and the Transmission of Conventional Monetary Policy Shocks," Finance and Economics Discussion Series 2020-014. Board of Governors of the Federal Reserve System (U.S.).

Abstract: Standard structural VAR models and estimation using Romer and Romer (2004) monetary policy shocks show that, in samples after the 1980s, a contractionary conventional monetary policy shock generates smaller and sometimes perversely-signed impulse responses compared to earlier samples. Using insights from the central bank information effects literature, we show that the analyses producing these results suffer from an omitted variables problem related to forward-looking information emanating from Federal Reserve forecasts. Transmission of conventional monetary policy shocks takes on the standard signs, and is typically significant, once Fed forward-looking information is taken into account. This reconciliation does not follow from adding private sector forecasts to the estimation frameworks.

Work in Progress

• Bu, Chunya (2023). "Sovereign Risks Priced in Corporate Bonds".

Abstract: This paper documents evidence of "Twin Ds" (Na, Schmitt-Grohé, Uribe, and Yue, 2018) - rise of sovereign risks followed by currency depredations - for the Euro-area. I propose a new measure of sovereign risks as the spread premium of EU firms over the average spreads in the US dollar bond market. Firm credit risks are carefully eliminated by focusing on EU firms issuing bonds in both USD and EUR, and controlling the firm fixed effect. This sovereign risk measure is closely correlated with the bilateral spot exchange rate. USD appreciates against EUR when the EU sovereign risks are high. A structural VAR model shows that a 100 basis-point positive country risk shock leads to around 200 basis-point decreases in the 1-month ahead spot exchange rate of USD to one EUR.

• Bu, Chunya (2024). "Country Heterogeneity in Financial and Trade Integration".

Abstract: I document country-heteogeneity in financial and trade integration. International capital flows and trade flows are more correlated for advanced economy, and less for the emerging markets. This empirical pattern indicates that  advanced economies choose to open goods and capital markets simultaneously, while  emerging markets choose to open one market. I embed this country-heterogeity into a international real busienss cycle model to study its implications on risk-sharing and capital flows. 

Other Work

•  World Economic Outlook (2021, October). International Monetary Fund.

• Journal review of Economic Letter, Review of Economics and Statistics.