Publication

• Constructing Divisa Monetary Aggregates for Singapore, Journal of Risk and Financial Management, 2021 (with William A. Barnett)

https://doi.org/10.3390/jrfm14080370

Works in progress

• Monetary Policy in a Small Open Economy with Multiple Monetary Assets

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Abstract: To examine the impact of openness on the volatility of macroeconomic variables in a small and open economy, we revisit the issues of money measurement. I compare the behavior of different money measures in the context of the New Keynesian framework with sticky price. I introduce the banking sector into the model, which allows the accommodation of multiple monetary assets like currency and interest-bearing-deposits. The central bank conducts its monetary policy via a simple interest rate rule. I explore the responses of different money measures, namely simple-sum, monetary base, and Divisia quantity aggregate with respect to domestic and foreign shocks and compare these responses with those from a theoretical monetary aggregator. I find that Divisia tracks the movement of money most closely to the theoretical measure, followed by monetary base, while simple sum often does not match the correct trend. I analyze the impact of openness, which has an inverse relation with home-bias in consumption, on the volatility of macroeconomic variables. I find that as a small economy becomes more open, domestic inflation and nominal interest rate are more volatile while term of trade and exchange rate become more stable. Among the different money measures, monetary base and Divisia follow the theoretical monetary aggregate to become less volatile as consumption becomes less home-biased, while simple-sum, again, does not.

• Distributional Welfare Effect of Inflation under Endogenous Search Model (with Eungsik Kim)

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Abstract: This paper addresses the classic issue of measuring the welfare cost of inflation. We extend the New Monetarist framework originated by Largo and Wright (2005) with a price dispersion mechanism similar to Wang (2016) but with the addition of heterogeneous productivity among agents. This productivity is the source of heterogeneous search cost among buyers, and it affects search intensity. Our model suggests that buyers of different productivity choose a different search intensity according to their opportunity cost of search. Low productivity group is inclined to search harder, and as a consequence, there is a positive externality towards high productivity group since they also benefit from sellers’ price dispersion. Overall, inflation has a distributional welfare effect on heterogeneous agents.

• Divisia Monetary Aggregates and Monetary Policy in Singapore

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Abstract: Recent New Keynesian DSGE models focus on interest rate and often ignore aggregate quantity of money as an instrument of monetary policy. In the case of small open economies such as Singapore, the effective exchange rate is managed to achieve goals for price stability and output growth. To examine the relevance of different tools of monetary policy in explaining real economy activity in Singapore, I apply the Hamilton based filter to extract the cyclical component of each time series and compute the cyclical correlation of different targets of monetary policy including interest rate, money supply and exchange rate with output and inflation. I also test the marginal information content of these monetary policy instruments in predicting output and inflation. For money supply, I compare different measures, including the official simple sum reported by the Monetary Authority of Singapore, the Divisia measures and recent credit-card-augmented Divisia monetary aggregates. I find that money shows a stronger relation with macroeconomic variables than both interest rate and exchange rate. Among different money measures, Divisia always shows a stronger correlation with both output and inflation than simple sum. Credit-card-augmented Divisa is the most informative indicator for predicting output and price.

• Trade War in a Two-Country-DSGE Model (with Jianbo Zhang)

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Abstract: This paper examines trade wars in a two-region DSGE model based on a real business cycle framework. In the game, the world consists of two countries, Home and Foreign, which produce different final goods and are linked through trade and an international financial market. Productivity is exogenous and asymmetric in both countries. Governments impose tariffs on imported goods. In a two-player game setting, both governments simultaneously choose tariffs to maximize social welfare. We want to test the hypothesis that trade wars occur due to a catching up effect, as productivity and technology in a smaller economy catches up with that of a larger economy, trade wars become more severe.