Jingxian Hu

Research

Interest Rates and Asset Prices under Financial Liberalization

Abstract: This paper constructs a general equilibrium model and studies the determination and the dynamics of the interest rates, the asset prices, and the exchange rates as the financial markets integrate globally and deepen with larger borrowing capacities. With the floating exchange rates, capital account liberalization increases the real interest rate in equilibrium, whereas financial development lowers the equilibrium real interest rate. In the fixed exchange rate regime, the equilibrium real interest rate is negative and rises as the financial market develops. The volatilities of the domestic equity price and bond price decline, and the domestic currency appreciates at the stochastic steady state with a deeper financial market and a more liberalized capital account. Faced with the uncertainty of the asset prices and the exchange rates, the design of monetary policy relies on accurate estimations of the financial volatilities. Proper reactions to the financial risks make central banks less constrained by the Mundell-Fleming trilemma and leave space for the policy rate adjustments under both exchange rate regimes.

AEA 2022 poster, Earlier version

Excess Volatility of British Pound: Jumps or Regime Switches?

Abstract: This paper estimates the dynamics of British pound exchange rate using continuous-time models which combine both Lévy process and regime-switching. It also compares the diffusion model, the regime-switching diffusion model, and the regime-switching Lévy model, and discusses the appropriate model selection for the nominal exchange rate. The characteristics of the estimated Markov regimes with jumps have a great match for the features of the business cycles and the exchange rate regimes in the U.K. history. It helps us better decompose the driving forces behind the spikes and slumps of the exchange rate and establishes a foundation for future studies to endogenously explain the excess volatility of the nominal exchange rate using macroeconomic variables.

AEA 2023 poster

Capital Control, Exchange Rate Regime, and Monetary Policy: Indeterminacy and Bifurcation

(with William A. Barnett)

Abstract: Will capital controls enhance macroeconomic stability? How will the results be influenced by the exchange rate regime and monetary policy reaction? Are the consequences of policy decisions involving capital controls easily predictable, or more complicated than may have been anticipated? We answer the above questions by investigating the macroeconomic dynamics of a small open economy. In recent years, these matters have become particularly important to emerging market economies, which have often adopted capital controls. We especially investigate two dynamical characteristics: indeterminacy and bifurcation. Four cases are explored, based on different exchange rate regimes and monetary policy rules.

With capital controls in place, we find that indeterminacy depends upon how the central bank's response to inflation and its response to output gap coordinate with each other in the Taylor rule. When forward-looking, both passive and active monetary policy can lead to indeterminacy. Compared with flexible exchange rates, fixed exchange rate regimes produce more complex indeterminacy conditions, depending upon the stickiness of prices and the elasticity of substitution between labor and consumption. We show the existence of Hopf bifurcation under capital controls with fixed exchange rates and current-looking monetary policy. To determine empirical relevance, we test indeterminacy empirically using Bayesian estimation. Fixed exchange rate regimes with capital controls produce larger posterior probability of the indeterminate region than a flexible exchange rate regime. Numerically, fixed exchange rate regimes with current-looking monetary policy lead to several kinds of bifurcation under capital controls.

We provide monetary policy suggestions on achieving macroeconomic stability through financial regulation.

Published version