ECB Lamfalussy Research Fellowship 2022  

(Job market paper)   

Rising asset prices are often assumed to exacerbate wealth inequality, but under what conditions can they mitigate it? This paper investigates how safe asset expansion—via financial innovation or stable bubbles—can counteract inequality driven by differences in asset returns and saving rates, using a dynamic general equilibrium model with heterogeneous agents. While these differences concentrate wealth without welfare gains, safe asset expansion reduces inequality and enhances welfare for less wealthy savers by boosting safe asset returns. This redistribution stems from entrepreneurs adjusting their debt issuance, increasing the supply of safe assets. The findings propose a new policy lever: issuing public debt to increase safe assets. This unified model reframes our understanding of asset markets and offers a practical approach to tackling wealth inequality.

with Chang He 

This paper provides a theoretical framework to understand the returns of sovereign bonds issued in different currencies in both normal and crisis times. Using a continuous-time two-country Lucas tree model with equity constraint, we show that the country-size effect and the equity-rebalancing effect are the key determinants of sovereign bond returns. The country size effect spills over home production risk to the smaller country through trade and equity rebalancing; equity constraint limits equity rebalancing and contributes to endogenous uncovered interest parity deviations in crisis times. In a period of crisis, the larger country’s sovereign bond becomes even safer when the country-size effect collaborates with the equity-rebalancing effect, as is the case with the United States. Our model mechanisms are supported by the empirical evidence for a set of advanced and emerging market economies.