Lixing Wang

RESEARCH PAPERS

• Green Business Cycle, June 2025

with Diego Känzig, Maximilian Konradt, Donghai Zhang.

This paper examines the relationship between green innovation and the business cycle, revealing that while non-green innovation is procyclical, green innovation is countercyclical. This pattern holds unconditionally over the business cycle and conditional on economic shocks. Motivated by these findings, we develop a business cycle model with endogenous green and non-green innovation to explain their distinct cyclical behavior. The key mechanism operates through a `green is in the future' channel: green patents are expected to generate higher profits in the future, making green patenting less sensitive to short-term economic fluctuations. In general equilibrium, this channel is reinforced, making green and non-green innovation effective substitutes. We provide direct evidence supporting the model mechanism using data on market-implied values of green and non-green patents.

• A Theory of Lumpy Innovation and Aggregate Dynamics, May 2025 (submitted)

with Donghai Zhang.

We propose a new theory of lumpy innovation by developing a business cycle model with endogenous innovation, heterogeneous innovating firms, and fixed adjustment costs. Through this framework, we uncover a novel mechanism underpinning the “Great Twins” hypothesis: the Great Moderation--marked by diminished economic volatility up to 2008--causally intensified the severity of the subsequent Great Recession. Moreover, the same mechanism leads to the underutilization of innovative ideas. As a result, reduced volatility can hinder average U.S. economic growth. The paper also provides both micro- and macro-level evidence to substantiate the proposed theory of lumpy innovation.

• Investment Lumpiness and Equity Returns, available soon

with Zhou Ren, Youchang Wu.

Using a stylized model of lumpy investment, we derive a novel measure of the expected distortion in firms' capital stock caused by fixed adjustment costs. We apply this measure to U.S. public firms, and find that a strategy that longs firms in industries with high fixed adjustment costs and shorts those in industries with low fixed adjustment costs yields an equal-weighted (value-weighted) CAPM alpha of 6.78% (5.50%) per annum. To account for this return spread, we develop a quantitative model that incorporates aggregate productivity shocks, aggregate adjustment friction shocks, and heterogeneous firm-level adjustment friction. Our model demonstrates that firms with high adjustment frictions exhibit both higher returns and lower market betas relative to their low-friction counterparts, consistent with the data.

• The Political Origin of Credit Cycle,  July 2024

with Zhou Ren.

We find a decline in government’s popularity predicts a subsequent increase in credit to GDP ratio by investigating a cross-country panel with 22 advanced economies from 1984 to 2016. The result suggests governments may manipulate their supports by actively intervening the credit market. We use U.S. mortgage data provide further evidences of the negative relationship between government popularity and subsequent change in the amount of government-backed loans, a fiscal credit policy tool widely used in U.S. and other advanced countries. We argue that when the shock to government popularity is persistent and the information friction in financial market is important, government will have incentive to smooth the popularity shock by adjusting fiscal credit policies, while if an economy’s dominant financial friction is the barrier of entry, government will turn to the traditional fiscal policies.