Research
Peer-Reviewed Publications
A Microfounded Approach to Currency Substitution and Government Policy - Journal of Economic Theory, 2024, Vol. 219. [working paper version]
Abstract: This paper develops a search-theoretic, two-country, dual-currency model featuring endogenous currency substitution with costly authentication of foreign currency. Benevolent governments, unable to commit to future policies, determine fiscal and monetary policy weighing distortion-smoothing and time-consistency. Decisions of the fiscal authority are accommodated by the monetary authority, where public expenditures, public debt, labor taxation, and inflation are determined using the notion of a Markov-perfect equilibrium. Inflation differentials arise endogenously from cross-country heterogeneities in the citizens' valuation of public goods, rendering international differences in fiscal imbalances the root cause for currency substitution. A steady-state analysis characterizes long-run allocations and identifies the domestic and foreign governments' best responses to changes in local payment patterns. Historical data supports the theoretical findings and provides empirical evidence for the positive relationship between currency-substitution ratios, inflation, and public debt. An extension studying de jure dollarization shows that time-consistency concerns disappear once currency substitution is imposed exogenously, reducing the government's objective to distortion-smoothing exclusively.
Asymmetric Information in Frictional Markets for Liquidity: Collateralized Credit vs Asset Sale - Journal of Economic Dynamics and Control, 2024, Vol. 159. [working paper version]
Abstract: This paper studies (non-)equivalence of collateralized credit and asset sales in over-the-counter markets subject to commitment and information frictions. Embedded in a search-theoretic general equilibrium model, a signaling game refined by the undefeated equilibrium endogenizes the choice between pooling and separating offers and provides novel insights under what conditions either payment strategy dominates the other. The results show that non-equivalence depends on economic fundamentals, commitment, and information frictions. Despite adverse selection, first-best consumption can occur for collateralized credit, but not for asset sales, with belief-driven endogenous haircuts and over-collateralization characterizing the terms of trade. An extension incorporating co-existing information-sensitive assets and fiat money sheds new light on portfolio management and diversification under private information and ties optimal payment strategies to monetary policy.
Entrepreneurial Finance and Monetary Policy (joint with Paul Jackson) - European Economic Review, 2022, Vol. 141. [working paper version]
Abstract: We model entrepreneurial finance in a search-theoretic framework with endogenous firm entry and exit. Entrepreneurs fund risky investments using a combination of savings, credit cards, bank loans, and home equity loans. The banking sector is over-the-counter, where bargaining determines the pass-through from the nominal interest rate to the bank lending rate, relating the transmission channel of monetary policy to output risk, financial frictions, and the housing market. Firm entry and exit generate heterogeneity in two dimensions: firm age and firm size. At a given nominal interest rate, new (mature) entrepreneurs finance a smaller (larger) share of investments internally and are more (less) liquidity constrained. A calibration to the U.S. between 2000–2016 complements the theoretical results and identifies the entry margin as a key driver in the transmission of monetary policy to aggregate output.
Frictional Asset Reallocation under Adverse Selection - Journal of Economic Dynamics and Control, 2019, Vol. 100, pp. 115-130. [working paper version]
Abstract: This paper studies asset reallocation in over-the-counter markets subject to search, bargaining, and information frictions, and discusses their implications for optimal monetary policy. The results show that inefficiencies arise from trade under private information, resulting in reduced trading volume and consumption. Conditional on search frictions in the over-the-counter market, information frictions can be both welfare-decreasing and welfare-increasing, addressing the pecuniary externality arising from the portfolio choice of liquid and illiquid assets. Optimality is guaranteed under the Friedman rule. Away from the Friedman rule, efficiency can be restored through open market operations, exchanging information-sensitive assets for risk-free bonds, as conducted by the Federal Reserve in response to the global financial crisis.
Comments on 'Frictional Capital Reallocation I: Ex Ante Heterogeneity' by R. Wright, S.X. Xiao, and Y. Zhu (joint with Aleksander Berentsen) - Journal of Economic Dynamics and Control, 2018, Vol. 89, pp. 117-119.
Abstract: This comment discusses the paper on 'Frictional capital reallocation I: Ex ante heterogeneity' written by R. Wright, S.X. Xiao, and Y. Zhu published in the special 'Fed St. Louis-JEDC-SCG-SNB-UniBern' conference issue on 'Fiscal and Monetary Policies' in the Journal of Economic Dynamics and Control.
Resting Papers
Abstract: Using a dynamic stochastic general equilibrium model, this paper studies optimal sovereign debt policies in the presence of self-fulfilling prophecies and martingale gambling strategies. Calibrating the model to the GIIPS countries during the European sovereign debt crisis, the results show that policy interventions reducing the cost of sovereign default can promote gambling for redemption during recessions. An unintended increase in sovereign debt is the consequence, as seen in the case of e.g. Greece.