11. How Trade Drives Fluctuations in Macroeconomics in China – A Multi-Level Dynamic Factor Approach, with Jianghuai Hou and Fang Wang, China Economic Review, 2025, Volumn 91, 102393.
Investigating how international trade with different regions and in different industries affects the macroeconomy is crucial for policymaking and economic forecasting, particularly in the context of trade frictions. Using a dynamic hierarchical factor model (DHFM) and factoraugmented vector autoregression (FAVAR) model, we extract factors from extensive trade data to explore their impacts on and interactions with the macroeconomy. Our findings reveal three key aspects. First, a positive shock to the overall trade factor generates positive macroeconomic effects, though with notable regional varia- tions. The OECD factor triggers inflationary pressures and monetary tightening in both China and the US, whereas the ASEAN factor leads to policy divergence—China opts for monetary easing against US tightening—accompanied by improved foreign direct investment (FDI) inflows and stock market performance. Second, in the in- dustry dimension, positive shocks to the medium-tech and hightech manufacturing sector demonstrate sustained industrial growth and positive FDI trends, despite some financial market uncertainties. Third, regarding policy interactions, we find a contractionary US monetary policy shock significantly impacts China’s trade and macroeconomic cycles,whereas a contractionary Chinese monetary policy shock shows relatively ambiguous effects.Motivated by empirical evidence, we propose an open-economy New Keynesian model with financial integration that allows financial intermediaries to hold foreign long-term bonds. We find financial integration features an amplification for a domestic monetary policy shock and a negative spillover for a foreign shock. These results hold for conventional and unconventional monetary policies. Among various aspects of financial integration, the bond duration plays a major role, and our results cannot be replicated by a standard model of perfect risk sharing between households. Finally, we observe an important interaction between financial integration and trade openness, and demonstrate trade alone does not have an economically meaningful impact on monetary policy transmission.
10. The Role of International Financial Integration in Monetary Policy Transmission, with Jing Cynthia Wu and Yinxi Xie, IMF Economic Review, 2024.
Motivated by empirical evidence, we propose an open-economy New Keynesian model with financial integration that allows financial intermediaries to hold foreign long-term bonds. We find financial integration features an amplification for a domestic monetary policy shock and a negative spillover for a foreign shock. These results hold for conventional and unconventional monetary policies. Among various aspects of financial integration, the bond duration plays a major role, and our results cannot be replicated by a standard model of perfect risk sharing between households. Finally, we observe an important interaction between financial integration and trade openness, and demonstrate trade alone does not have an economically meaningful impact on monetary policy transmission.
9. The Four Equation New Keynesian Model, with Eric Sims and Jing Cynthia Wu, Review of Economics and Statistics, 2023, 105(4), 931-947.
This paper develops a New Keynesian model featuring financial intermediation, short- and long-term bonds, credit shocks, and scope for unconventional monetary policy. The log-linearized model reduces to four key equations -- a Phillips curve, an IS equation, and policy rules for the short-term nominal interest rate and the central bank's long bond portfolio (QE). The four equation model collapses to the standard three equation New Keynesian model under a simple parameter restriction. Credit shocks and QE appear in both the IS and Phillips curves. In equilibrium, optimal monetary policy entails adjusting the short-term interest rate to offset natural rate shocks, but using QE to offset credit market disruptions. Such policies can be supported by implementable rules in which the short-term interest rate reacts strongly to inflation and the central bank's bond portfolio reacts strongly to the output gap. The ability of the central bank to engage in QE significantly mitigates the costs of a binding zero lower bound.
8. Does Fiscal Policy Matter for Stock-Bond Return Correlation? with Erica X.N. Li, Tao Zha and Hao Zhou, Journal of Monetary Economics, May 2022, Volume 128, pp. 20-34.
Switching between monetary and fiscal regimes is incorporated in a general-equilibrium model to explain three stylized facts: (1) a positive correlation of stock and bond returns in 1971-2001 and a negative correlation after 2001, (2) a negative correlation of consumption and inflation in 1971-2001 and a positive correlation after 2001, and (3) the coexistence of a positive bond risk premium and a negative correlation of stock and bond returns. While the technology shock drives the positive stock-bond and negative consumption-inflation correlations in the monetary regime, the investment shock drives the negative stock-bond and positive consumption-inflation correlations in the fiscal regime.
7. Monetary Policy, Hot Money and Housing Price Growth across Chinese Cities, with Xiaoyu Huang and Tao Jin, Applied Economics, 2021, Volume 53, No. 59 6855-6877.
We use a dynamic hierarchical factor model to identify the national, regional and local factors of the city-level housing price growth in China. During the zero-lower-bound (ZLB) episode in the U.S., local factors account for 78% of variations in the month-on-month city-level housing price growth. However, as the time horizon extends, the national factor gets a larger variance share, reaching 51% in a half-year horizon. This indicates that the city-level housing price growth in China is more of a national phenomenon in the long run. We then use a VAR model to investigate the driving forces of the national factor and find that monetary policy and hot money shocks affect the national housing price growth significantly. A tightening monetary policy shock has a significant negative impact on the national factor, which lasts for more than 2 years. An increase in hot money inflows causes a significant but transitory rise in the national factor. Moreover, we find that the quantitative easing measure adopted by the U.S. Fed is behind the surge of capital inflows into China.
6. A Shadow Rate New Keynesian Model, with Jing Cynthia Wu, Journal of Economic Dynamics and Control, October 2019, Volume 109, 103728.
We propose a New Keynesian model with the shadow rate, which is the federal funds rate during normal times. At the zero lower bound, we establish empirically the negative shadow rate summarizes unconventional monetary policy with its resemblance to private interest rates, the Fed's balance sheet, and Taylor rule. Theoretically, we formalize our shadow rate New Keynesian model with QE and lending facilities. Our model generates data-consistent results: a negative supply shock is always contractionary. It also salvages the New Keynesian model from the zero lower bound induced structural break.
5. The Role of the World Factor in Driving Emerging Market Exchange Rates, with Clark Liu, Ben Zhe Wang, and Huanhuan Wang, Economic Systems, June 2019, Volume 43, Issue 2.
Applying a dynamic hierarchical factor model on the percentage changes of twenty emerging market bilateral exchange rates, we disentangle the fluctuations of these rates into a world factor, three regional and twenty country factors. We find that the world factor plays a minor role in driving the fluctuations of emerging market exchange rates, but that become increasingly important since the 2008 global financial crisis.
4. Global Effective Lower Bound and Unconventional Monetary Policy, with Jing Cynthia Wu, Journal of International Economics, May 2019,Volume 118, pp. 200-216.
In a standard open-economy New Keynesian model, the effective lower bound causes anomalies: output and terms of trade respond to a supply shock in the opposite direction compared to normal times. We introduce a tractable framework to accommodate for unconventional monetary policy. In our model, these anomalies disappear. We allow unconventional policy to be partially active and asymmetric between countries. Empirically, we find the US, Euro area, UK, and Japan have implemented a considerable amount of unconventional monetary policy: the US and Japan follow the historical Taylor rule, whereas the others have done less compared to normal times.
3. Hot Money and Quantitative Easing: The Spillover Effects of U.S. Monetary Policy on the Chinese Economy, with Steven Wei Ho and Hao Zhou, Journal of Money, Credit and Banking, October 2018, Volume 50, Issue 7, pp. 1543-1569.
We develop a factor-augmented vector autoregression model to estimate the effects of changes in U.S. monetary policy and economic policy uncertainty have on the Chinese housing, equity and loan markets. We find that the decline in the U.S. policy rate since the Great Recession has led to a significant increase in Chinese regulated interest rates and to a rise in Chinese housing investment. One possible reason for this effect is the substantial inflow of "hot money" into China. The responses of Chinese variables to U.S. shocks at the zero lower bound are different from those responses in normal times. Moreover, increased uncertainty regarding U.S. policy negatively impacts the Chinese real estate markets during normal times but not at the zero lower bound.
2. Unemployment Benefits and Matching Efficiency in an Estimated DSGE Model with Labor Market Search Frictions, Macroeconomic Dynamics, December 2017, Volume 21, Issue 8, pp. 2033-2069.
To explain the high and persistent unemployment rate in the U.S. during and after the Great Recession, this effort develops and estimates a DSGE model with search and matching frictions and shocks to unemployment benefits and matching efficiency. It finds that the unemployment benefits play an important role in the cyclical movement of unemployment through their effects on labor demand, a channel overlooked in previous studies. From the second half of 2008 to 2011, extended unemployment benefits may have increased the overall unemployment rate by 1 percentage point. In contrast, matching efficiency changes have less effect on the cyclical movement of unemployment for the same period, but significantly slowed down the recovery after 2012.
1. Macroeconomic News and the Real Interest Rates at the Zero Lower Bound, Journal of Macroeconomics, 2016, Volume 48, pp. 172-185 48 (2016) 172-185.
Whether the real interest rates respond in a different manner to macroeconomic news at the zero lower bound (ZLB) as compared to the case away from the ZLB is essential for assessing the effectiveness of government policies and the validity of the policy implications of New Keynesian models at the ZLB. The results from analyzing "real-side" news and price news reveal that nominal rates are less sensitive to news, while real interest rates respond to some news in the opposite direction at the zero lower bound as they would do in normal times. This suggests that, at least in the short run, policies that increase inflation (e.g., fiscal expansion) are favorable to the economy at the zero lower bound; this result is consistent with the prediction of the New Keynesian models. By using an identification strategy based on heterogeneity, I find that at the ZLB, monetary policy news is less effective in affecting short- and medium-term real rates and its effect dies off faster.
2. 地方政府隐性债务与货币政策传导效率，合作者：陈舒悦、刘悦，已接收，《经济学（季刊）》，2022年。
1. 工资变化与企业用工形式，合作者：王欢欢、胡冬敏，《经济学（季刊）》，2022年，第22卷第4期。
7. Unconventional Monetary Policy under a Monetary Union -- Spillover Effects through Sovereign Bond Cross-Holdings, with Dongzhou Mei and Shiyan Zeng
Motivated by the spread of crises in the Eurozone, we propose an open-economy New Keyesian model in a monetary union with cross-border sovereign bond holdings and financial frictions. We find that cross-border bond holdings propagate sovereign risk shocks throughout the monetary union. This transmission mechanism enables the periphery to transfer a portion of its risk exposure to the core, thereby impairing the balance sheets of financial intermediaries on both sides. Consequently, unconventional tools (e.g., QE, macro-prudential policy), which directly repair and recapitalize these crisis-damaged balance sheets, prove superior to a uniform interest rate policy.
6. Fiscal Policy: Financing and Indebtedness, with Jing Cynthia Wu, Shihan Xie, and Yinxi Xie
We conduct a large-scale information randomized controlled trial to study fiscal policy impacts. Surveying approximately 9,000 households across five eurozone countries with varying debt-to-GDP ratios enables a clean cross-country comparison. The key finding is that the fiscal multiplier depends jointly on the financing method and the country’s debt burden: multipliers are smaller in high-debt countries when debt-financed but remain similar across countries when tax-financed. Finally, we develop a New Keynesian model featuring fiscal discipline, which reproduces the empirical patterns observed in the survey and highlights their underlying economic mechanisms.
5. Unconventional Policy and Inflation, with Jing Cynthia Wu and Yinxi Xie
We study the effects of unconventional monetary and fiscal policies on inflation dynamics. Using multiple complementary empirical approaches, including event studies, vector autoregressions, and regional panel regressions, we find little evidence that these policies contributed meaningfully to inflation in the past decades. The key economic mechanism operates through a disinflationary supply-side channel in the Phillips curve, which offsets the upward pressure on inflation from the usual demand channel. We demonstrate this mechanism both theoretically and empirically.
4. Unconventional Monetary Policy According to HANK, with Eric Sims and Jing Cynthia Wu
This paper studies the implications of household heterogeneity for the effectiveness of quantitative easing (QE). We consider a heterogeneous agent New Keynesian (HANK) model with uninsurable household income risk. Financial intermediaries are subject to an endogenous leverage constraint that allows QE to matter. We find that macro aggregates react very similarly to a QE shock in a HANK model compared to a representative agent (RANK) version of the model. This finding is robust across different micro- and macro- distributions of wealth, although these distribution rules have implications for popular inequality metrics as well as the fraction of households that are at the borrowing constraint.
3. Nominal Rigidities, Earnings Manipulation, and Securities, with Erica X.N. Li, Pengfei Wang and Jin Xie
This paper documents a new fact and analyzes the theoretical underpinnings behind it: firms with sticky-output prices misreport earnings more and incur higher borrowing costs prior to the passage of the Sarbanes-Oxley Act (SOX). However, their misreporting frequency and borrowing costs drop immediately after SOX --- both relative to pre-SOX levels and to flexible-price firms, which we identify using a difference-in-differences strategy. We develop a model of earnings manipulation with endogenous manipulation costs, in which product prices signal managers' private information about shocks to firm profits, and mimicking firms must set a price identical to that of the firms they mimic. The model organizes the evidence into a unified framework: managers' incentives to manipulate earnings increase when firms cannot adjust product prices, whereas stringent regulatory enforcement reduces these incentives. We conclude that nominal rigidities can aggravate financial friction because of earnings manipulation by firm insiders.
2. State-Promoted Investment for Industrial Reforms: an Information Design Approach, with Keeyoung Rhee and Myungkyu Shim
We analyze the optimal strategy for a government to promote large-scale investment projects under information frictions. Specifically, we propose a model where the government collects information on profitability of each investment and discloses it to private investors. We derive the government's optimal information policy, which is characterized as threshold values for the unknown profitability of the projects released to the private investors, and study how the underlying features of the economy affect the optimal policies. We find that when multiple projects are available, the government promotes the project with a bigger spillover effect by fully revealing the true state of the economy only when its profitability is substantially high. Moreover, the development of the financial/information market also affects the optimal rule.
1. Liquidity Shocks and Macroeconomic Policies in a Model with Labor Market Search Frictions
By introducing a labor market with search frictions into a Kiyotaki-Moore model, I study the effect of liquidity shocks and several policies. I find that in the model with endogenous separation and real wage rigidity, extended unemployment benefits could slightly alleviate the big decline in output caused by a liquidity shock through mitigating current consumption decline, but raise unemployment and slow the recovery of the labor market. Unconventional credit policy is very effective in stabilizing output. Fiscal expansion has positive on impact effect but negative cumulative effect. The presence of the zero lower bound on the nominal interest rate is needed to get the above results. The importance and the length of staying at the zero lower bound depend on the type of labor market rigidities.