Curriculum Vitae

Research

"Excess Capacity and Demand Driven Business Cycles", Tiancheng Sun, The Review of Economics Studies, 2024

I build a macroeconomic model that features chronic excess capacity. Firms can use their capacity to compete for buyers who are not fully attentive to prices. If one firm expands capacity while other firms do not, it “steals” or attracts profitable demand from others. Theoretically, I show that this capacity competition can cause an over-accumulation of capacity. In the presence of chronic excess capacity, capital resources can be slack, and demand shocks can have large effects on output. The model is consistent with stylized facts about capacity utilization and survey evidence from Switzerland. Quantitatively, when the model is estimated to match the U.S. macro data, demand shocks turn out to be the main driving forces of business cycles.

"The Role of Sell Frictions for Inventories and Business Cycles", Wouter J. Den Haan and Tiancheng Sun, The CFM Discussion Paper Series, 2024

Although investment in inventories significantly impacts GDP fluctuations, inventories are often omitted from business-cycle models due to their complex cyclical behavior. We incorporate finished-goods inventories into a NewKeynesian framework by introducing a tractable microfounded “sell friction.” Our approach simplifies existing approaches by avoiding product-specific idiosyncratic shocks while capturing the essence of the popular stockout avoidance motive. Specifically, firms strategically accumulate inventories by bringing more products to the market than they anticipate selling, thereby boosting expected sales. Our setup automatically generates key stylized facts such as the countercyclical nature of the inventory-sales ratio and the greater volatility of output compared to sales under business cycles driven by monetary-policy (demand) shocks. A novel aspect of our analysis is the recognition of an inventory good as an asset and that cyclical fluctuations of its value play a key role following supply shocks. Specifically, the value of an inventory good is robustly countercyclical in our model when the productivity-growth process mirrors the observed positive autocorrelation. This ensures that the model also robustly replicates stylized inventory facts in response to productivity (supply) shocks, which has been a challenge in the literature. Using inventory and sales data to discipline the model, we find that productivity shocks account for a large fraction of GDP fluctuations, ranging from 62.5% to 94%. Furthermore, the goods-market friction yields non-trivial effects on the magnitude of aggregate fluctuations, underscoring the importance of incorporating inventories into macroeconomic models.

"Limited Attention, Heterogeneous Returns to Wealth, and Wealth Inequality", Tiancheng Sun and Jiahao Tang, working paper, 2023

We build a general equilibrium model where the rich enjoy a higher return than the poor.  The rich, because they control more wealth and pay more attention to the capital market, are more capable to accummulate high return private capital than the poor.  Thus, the rich get richer. The systematic return difference between the rich and the poor not only explains the high wealth inequality but also explains the rapid rising of wealth inequality in the recent decades. The latter is notoriously difficult to be explained by standard models in the literature. 

"Difficulties of Demand Driving Business Cycles in Efficient Utilization Models", working paper, 2020

I show that in models with efficient utilization of capital or capacity, there is no capacity competition externality. None of these models could feature chronic excess capacity nor capital resource slackness. Thus, the response of output to demand shocks is limited and it is difficult to obtain demand driven business cycles in these models.

"Capacity Competition Externality and Chronic Excess Capacity", working paper, 2020

I study what kind of goods market structure features the capacity competition externality that can cause chronic excess capacity. The following assumptions are identified. First, if a firm expands its capacity while other firms do not, it can “steal” demand from others. Second, firms can charge a sufficiently high price to make a positive net profit. These two assumptions imply a negative capacity competition externality and are sufficient to cause long-term capacity underutilization at the firm-level. Third, if the invested capital has no positive externality that can potentially offset the negative externality, the capacity competition externality will be dominant and the economy will exhibit chronic excess capacity. I present several different ways to micro-found this kind of goods market structure, demonstrating the generality of the results.

“Understanding Sunspot Equilibria”, work in progress, 2020

Understanding sunspot equilibria is important for us to understand to what extent a fixed nominal interest rate would cause macroeconomic instability. Macroeconomists usually accept stable sunspot paths as rational expectation equilibria (REE). There are two concerns about this practice. First, explosive sunspot paths may also be REE because we may not have a relevant transversality condition to rule them out (e.g., Cochrane, 2011). Second, many economists argue that a reasonable equilibrium should be learnable (e.g., Christiano et al., 2018), but sunspot equilibria are not guaranteed to be learnable. In a simple Keynesian beauty contest model based on Moulin (1986), I show that both explosive and stable sunspot paths are rational expectation equilibria but all sunspot equilibria, regardless of their stability, are not learnable under adaptive learning. The only learnable equilibrium turns out to be the one without any sunspot shocks.