Financial Economist and Assistant Adviser 

Federal Reserve Bank of Atlanta

1000 Peachtree St NE, Atlanta, GA 30309

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

Published Papers

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. 

accepted Management Science (with  Taeuk Seo and Yu Xu)   SSRN version 

Abstract:  We establish an observational equivalence between unemployment fluctuations of the Diamond-Mortensen-Pissarides search economy augmented with time-varying risk premia, and an otherwise identical economy without risk-premia but with a time-varying value of leisure. This equivalence holds for general risk-premia processes and 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. We derive simple expressions for semi-elasticities of labor market tightness with respect to productivity and risk premium shocks. We show wages can be used to detect misspecification in the discount rate process used in hiring decisions. 

(with Yu Xu)  accepted 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.

Working Papers

(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  Alex Hsu, Yu Xu, and Linghang Zeng

Abstract:  We present evidence that the Fed's private information about economic conditions revealed through FOMC announcements affect firm investment. We use firm-level investment data and analyst forecasts of firm fundamentals to document three facts. First, the investment rate sensitivity to Fed information is greater for more cyclical firms. Second, revisions in analyst forecasts of firm fundamentals are greater for more cyclical firms. Third, the investment response is consistent with changes in firm profitability following Fed announcements. We propose a HANK model to explain these patterns. Our model rationalizes the slow decline in inflation in 2022-2023 despite aggressive policy rate hikes.

(with  Erhan Bayraktar and Jingjie Zhang)

Abstract:  We use mean-field game theory to quantitatively compare two unemployment insurance (UI) extension policies commonly used during recessions: raising benefit levels versus extending the duration of benefits. Our heterogenous-agent model features costly job search and individual savings. Our calibrated model matches the savings distribution observed in the U.S. After requiring that the two UI policies have the same cost, we find: (1) a large, one-time lumpsum payment results in lower unemployment rates relative to a moderate, long-lived increase in benefits and (2) both policies deliver approximately the same ex-ante expected utility to unemployed individuals. 

(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.

Selected discussions

(by M. Meeuwis, D. Papanikolaou, J. Rothbaum,  and L. D. W. Schmidt)

WFA 2023

(by M. Zeng and G. Zhao)

WFA 2022

(by Borovicka and Borovickova)

WFA 2020

(by M.M. Croce, T. T. Nguyen, S. Raymond, and L. Schmid)

WFA 2017

(by L. Bretscher, A. Hsu, and A. Tamoni)

NFA 2017

(by G. Pennacchi and A. Tchistyi)

FIRS 2016