The Risk-Premium Channel of Uncertainty: Implications for Unemployment and Inflation (with Lukas B. Freund and Pontus Rendahl) [replication codes]
- Review of Economic Dynamics, Volume 51, December 2023, Pages 117-137
This paper studies the role of macroeconomic uncertainty in a search-and-matching framework with risk-averse households. Heightened uncertainty about future productivity reduces current economic activity even in the absence of nominal rigidities. A risk-premium mechanism accounts for this result. As future asset prices become more volatile and covary more positively with aggregate consumption, the risk premium rises in the present. The associated downward pressure on current asset values lowers firm entry, making it harder for workers to find jobs and reducing supply. With nominal rigidities the recession is exacerbated, as a more uncertain future reinforces households’ precautionary behavior, which causes demand to contract. Counterfactual analyses using a calibrated model imply that unemployment would rise by less than half as much absent the risk-premium channel. The presence of this mechanism implies that uncertainty shocks are less deflationary than regular demand shocks, nor can they be fully neutralized by monetary policy.
Striking While the Iron Is Cold: Fragility after a Surge of Lumpy Investments [appendix] [RePEc]
- R&R at Journal of the European Economic Association
Winner of the Best Paper Award for Early Career Academics at the Econometric Society Australasia Meeting 2022
Winner of the Hiram C. Haney Fellowship Award in Economics
Winner of the Thomas J. Sargent Dissertation Fellowship at the Federal Reserve Bank of San Francisco.
This paper studies how large firms' synchronized lumpy investments endogenously shape an economy's fragility to negative TFP shocks. I develop a heterogeneous-firm real business cycle model that matches the empirical interest elasticities of investment for both large and small firms. In the model, large firms' lumpy investments become persistently synchronized due to their low sensitivity to general equilibrium effects, generating investment surges. Following these surges, TFP-induced recessions are particularly severe, and the semi-elasticity of aggregate investment drops significantly, consistent with the data.
Job market paper version: link
Global Nonlinear Solutions in Sequence Space and the Generalized Transition Function
[appendix] [sample codes] [slides] [RePEc]
This paper develops a unified framework for globally solving dynamic stochastic general equilibrium models with high accuracy and computational efficiency in sequence space. The method efficiently handles rich heterogeneity, nonlinearities such as occasionally binding constraints, and non-trivial market clearing conditions — without assuming perfect foresight. Building on this, I introduce the generalized transition function (GTF), defined as a sub-path of the recursive competitive equilibrium. The GTF nests generalized impulse responses and stochastic growth paths, enabling global analysis of state-dependent dynamics and the interaction between growth and uncertainty. Applications to heterogeneous-agent models with occasionally binding constraints and portfolio choice reveal rich equilibrium predictions driven by the cross-sectional heterogeneity — including uncertainty-driven dampened growth, endogenous disasters, state-dependent fiscal multipliers, heterogeneous portfolio adjustments over the business cycle, and state-dependent risk premium dynamics.
Bridging Micro and Macro Production Functions: The Fiscal Multiplier of Infrastructure Investment (with Minsu Chang) [appendix]
- Accepted subject to minor revision at Journal of Monetary Economics
This paper investigates the fiscal multiplier of infrastructure investment using an estimated heterogeneous-firm general equilibrium model. We show theoretically and quantitatively that the firm-level non-rivalry in infrastructure usage drives a significant discrepancy between the estimated input elasticities at the firm level and the state level. In addition, we link our firm-level production function to a canonical production function in a representative-agent framework (Baxter and King, 1993). The quantitative findings indicate a fiscal multiplier of approximately 1.09 over a 2-year horizon, suggesting a moderate net economic benefit from infrastructure investment, which is significantly higher than the representative-agent model prediction. This is due to the low sensitivity of the firm-level investment to the general equilibrium effect, leading to a dampened crowding out.
Top Income Inequality and the Business Cycle
This paper studies how the pass-through businesses of top income earners affect the aggregate fluctuations in the U.S. economy. I develop a heterogeneous-household real business cycle model with endogenous labor supply and occupational choice and calibrate the model to capture the observed top income inequality. Compared to the counterfactual economy with the factor-income-driven top income inequality, the economy in the baseline model features the aggregate fluctuations that outperform in explaining the recent changes in the business cycle: 1) lower volatility of aggregate output and 2) stronger negative correlation between labor hour and productivity. Heterogeneous labor demand sensitivities to TFP shocks between pass-through businesses and C-corporations build the core of the aggregate dynamics, and the aggregate employment dynamics display substantial nonlinearity due to this heterogeneity.
The Inefficient Corporate Cash Buffer and the Nonlinear Business Cycle (with Miguel H. Ferreira and Timo Haber)
This paper studies the macroeconomic implications of corporate cash holdings over the business cycle. We develop a heterogeneous firm business cycle model in which firms accumulate cash for precautionary reasons. Firm-level cash accumulation is highly nonlinear due to a satiation point. This nonlinearity survives aggregation, shaping the aggregate allocations’ state-dependent responsiveness to TFP shocks. In periods of high cash holdings, firms can smooth dividend payouts, thereby dampening the response of aggregate consumption to adverse TFP shocks. Despite this stabilizing role, we show that the decentralized equilibrium level of cash holdings is inefficiently high due to a negative pecuniary externality. We conclude by providing micro-level empirical evidence in support of the model’s key mechanisms.
Rising Intangibles and Technology-Biased Technical Change (with Jesús Fernández-Villaverde)
An Analytic Theory of Frictional Firm Dynamics (with Vasco M. Carvalho)
From Spreads to Spirals: How Financial Frictions Drive Lumpy Investments (with Miguel H. Ferreira and Timo Haber)
Endogenous Job Separation and the Nonlinear Nature of the Beveridge Curve (with Philip Schnattinger and Francesco Zanetti)
Global Nonlinear Equilibrium Dynamics and the Zero Lower Bound (with Kao Nomura)
Heterogeneous Households and Aggregate Dynamics: Analytical Moment Recursion
Labor Market Impact of M&A and Skill Complementarity (with Minji Bang)
The Macroeconomic Effects of Cash Transfers: Evidence from Brazil (by Arthur Mendes, Wataru Miyamoto, Thuy Lan Nguyen, Steven Pennings, and Leo Feler), Financial and Economic Developments: New Challenges and Policy Solutions (Oxford-CEPR-BoJ-Waseda) at the Waseda University, 2024 [slides]
Evergreening (by Miguel Faria-e-Castro, Pascal Paul, and Juan M. Sánchez), Workshop on Financial Frictions, Zombie Firms and the Macroeconomy at the University of Oxford, 2023 [slides]
Understanding Trend Inflation Through the Lens of the Goods and Services Sectors (by Yunjong Eo, Luis Uzeda, and Benjamin Wong), Japan-Korea Economic Society Academic Exchange Workshop, 2022 [slides]