Research
Research
Sovereign debt pricing with shifting long-run growth expectations, corresponding author, with Pei Kuang, Aug 2025; Revise & Resubmit, July 2025, European Economic Review
Overview: The paper presents new evidence of systematic errors in real-time estimates of long-run output growth rates and, importantly, reveals a negative, nonlinear relationship between these estimates and sovereign debt spreads during the Eurozone debt crisis of the 2010s. To study the implications of these beliefs, we develop a sovereign default model in which agents infer trend growth from output growth (comprising both trend and cyclical components) and from noisy signals about the trend. The model reproduces the pattern of errors in the trend growth estimates and their negative and nonlinear relationship with spreads, unlike a comparable full-information model. Overoptimism about trend growth during booms encourages excessive borrowing, leading to persistently elevated spreads thereafter.
Transfer-Induced Debt Dynamics in Sovereign Default April 2025; Under review, July 2025
Overview: During the 2010s, the Greek sovereign debt crisis necessitated unprecedented EU financial aid accompanied by austerity conditions. Despite government spending and tax reforms, insufficient consolidation of social transfers led to unexpected expansions in transfer payments. This paper constructs a strategic sovereign default model, calibrated to Greek data, to examine the effects of transfer shocks on sovereign debt spreads. Under high financial stress (e.g., the elevated spreads at the inception of the 2010 Economic Adjustment Program), positive transfer shocks exacerbate already excessive absorption and significantly raise spreads. Under milder stress, these shocks initially produce negligible increases in spreads but lead to persistently higher spreads over the longer term. Stricter transfer-side austerity can help mitigate crises and may even avert default.
Fiscal Austerity and State-Dependent Response of Sovereign Spreads, June 2024 (Previously named "Fiscal Austerity, Investment and Sovereign Default", Reject & Resubmit, Review of Economic Dynamics); revising, Sep 2024
Overview: Does fiscal austerity influence sovereign default spreads in a state-dependent manner? To explore this question, I build an endogenous sovereign default model tailored to match the Greek 2012 default episodes. It incorporates long-maturity debt, government spending and tax rules, debt renegotiation, and KPR utility. This model replicates the empirical evidence of state-dependent spreads to spending cuts (Born et al., 2020): They significantly raise spreads under high financial stress but decrease spreads when stress is mild. In contrast, distortionary income tax-based austerity can reduce spreads without such state-dependence. Furthermore, the study highlights the crucial role of optimal debt issuance in this mechanism, underscoring the importance of credible borrowing disciplines to eliminate the debt dilution and default concerns among foreign creditors
Efficient Parallelization of Macroeconomic Models: A Matlab Executable Approach, corresponding author, with Alessandro Di Nola, New version forthcoming, GitHub link
Overview (new version): Solving nonlinear macroeconomic models requires substantial programming effort and computational time, which often constrains research.
Using state-of-the-art sovereign default and heterogeneous-agent models, we evaluate how parallelized computation with MATLAB Executables (Mex) can ease these constraints.
This hybrid approach translates MATLAB code into C (Mex parfor) and CUDA (Mex CUDA) executables, while still executing within MATLAB.
Compared with scripted parallel computation, Mex parfor achieves speedups of up to 500-fold, and Mex CUDA over 1000-fold, on par with other languages highly optimized for parallelization.
Moreover, this method is readily applicable to cloud resources such as Amazon AWS, enabling solving nonlinear models with higher dimensions.
Global Financial Cycle, Cross-border Capital Flow and Exchange Rate Regime Choice, with Shaochen Han, Bing Gong and Shiqi Yang, May 2023， Shanghai Journal of Economics, DOI: 10.19626/j.cnki.cn31-1163/f.2023.05.010