Financial Economist and Assistant Adviser

Federal Reserve Bank of Atlanta

1000 Peachtree St NE, Atlanta, GA 30309

  • Research interests

Equilibrium asset pricing, macro-finance, labor markets, consequences of household and firm heterogeneity, dynamic contracts.

Published Papers

  • Time-Varying Risk Premium and Unemployment Risk across Age Groups

The Review of Financial Studies 33 (8), 3624-3673 (with Yu Xu)

Abstract: We show that time-varying risk premium in financial markets can explain a key yet puzzling feature of labor markets: the large differences in unemployment risk faced by workers of different ages over the business cycle. Our search model features a time-varying risk premium and learning about unobserved heterogeneity in worker productivity. The interaction of these two features has large real effects through firms' labor policies. Our model predicts the unemployment risk of young workers relative to prime-age workers to be more sensitive to productivity shocks (a) when market risk premium is high, and (b) in high beta industries. We find empirical support for these predictions.

Working Papers

(with Yu Xu) R&R Review of Financial Studies

Abstract: We present a theory in which the interaction between limited sharing of idiosyncratic labor income risk and labor adjustment costs (that endogenously arise through search frictions) determines interest rate dynamics. In the general equilibrium, the interaction of these two ingredients relates bond risk premia, cross-sectional skewness of income growth, and labor market tightness. Our model rationalizes an upward sloping average yield curve and makes two predictions: (1) a flatter real yield curve in economies with lower job-finding rates, and (2) a negative relation between labor market tightness and bond risk premia. We provide evidence for our theory's mechanism and predictions.

(with Leonid Kogan) R&R Review of Financial Studies

Abstract: We propose a simulation-based procedure for evaluating approximation accuracy of numerical solutions of general equilibrium models with heterogeneous agents. We measure the approximation accuracy by the magnitude of the welfare loss suffered by agents from following sub-optimal policies. Our procedure allows agents to have knowledge of the future paths of the economy under suitably imposed costs of foresight. This method is general, straightforward to implement, and can be used in conjunction with various solution algorithms. We illustrate our method in two contexts: the incomplete-markets model of Krusell and Smith (1998) and the heterogeneous firm model of Khan and Thomas (2008).

(with Taeuk Seo and Yu Xu)

Abstract: We establish an observational equivalence between the unemployment fluctuations of two economies: the Diamond-Mortensen-Pissarides (DMP) search economy augmented to feature time-varying risk premia, and an otherwise identical economy without risk premia but with a time-varying value of leisure. This equivalence allows us to view the effects of different models of risk premia as operating through a single channel -- one that alters the value of leisure in the familiar setting of the DMP model. We use the equivalence to derive simple expressions for the semi-elasticities of labor market tightness with respect to productivity and risk premium shocks.

(with Erhan Bayraktar and Jingjie Zhang)

Abstract: We analyze the general equilibrium effects of countercyclical unemployment benefit policies. Our heterogenous-agent model features costly job search with imperfect insurance of unemployment risk and individual savings. Our model predicts: (1) the additional unemployment under a countercyclical policy relative to that under an acyclical policy to be a superlinear function of the aggregate shock’s size, (2) a higher unemployment rate sensitivity to UI policy changes when individual savings are relatively low. Our estimates of the effects of UI policy changes are based on transition dynamics; we show these estimates to be substantially different from estimates based on steady-state analyses.

(with Yu Xu)

Abstract: We analyze the consequences of ambiguity aversion in the Diamond-Mortensen-Pissarides (DMP) search and matching model. Our model features a cross-section of workers whose productivity is the sum of an aggregate and a match-specific component. Firms are ambiguity averse towards match-specific productivity. Our model delivers two insights. First, we show that ambiguity aversion substantially amplifies unemployment rate volatility. Second, we show that a part of the high value of leisure required by the canonical DMP model to generate realistic unemployment rate volatility can arise from fitting a model missing ambiguity aversion to data generated in an environment where agents are ambiguity averse.

Abstract: Young firms respond more strongly to changing investment opportunities than mature firms. I provide a financial friction-based explanation of this phenomenon and quantify the general equilibrium implications of this heterogeneity. In my model, a representative investor finances firms with optimal long-term contracts derived from a moral hazard problem. I analyze how these contracts respond to an aggregate uncertainty shock. My model predicts: (1) a higher investment rate sensitivity to this shock for younger firms. I provide evidence of this prediction. (2) A large uncertainty shock prolongs recovery of aggregate quantities substantially. This provides a potential resolution to the slow recovery puzzle in the literature.