Revise and Resubmit  at Journal of Monetary Economics

ECB Lamfalussy Research Fellowship 2022    

Can rising asset prices reduce wealth inequality? This paper builds a continuous-time heterogeneous-agent general equilibrium where entrepreneurs hold risky private capital and traditional savers hold safe assets. Expansions of safe assets—via financial innovation, public debt, or a stable equity bubble—reduce entrepreneurs’ undiversified risk, compress risk premia, and raise the interest rate. This slows entrepreneurial wealth accumulation and redistributes wealth toward traditional savers. Savers gain unambiguously. Entrepreneurs’ welfare is state-dependent: when their wealth share is low, they prefer a higher risk premium and lose; once sufficiently wealthy, they prefer a higher interest rate that protects a larger wealth base and gain.

with Chang He 

We develop a theory of international asset returns in a two-country Lucas-tree model with a leverage constraint on financial intermediaries. Our model explains why U.S. Treasuries earn a convenience yield that rises in crises precisely when equity markets fall and international risk sharing breaks down. In normal times, the larger country (the U.S.) absorbs more global consumption risks and earns lower Treasury returns. In crisis times, the leverage constraint tightens and Treasuries receive preferential balance sheet treatment, making safe assets scarce and generating a convenience yield. These frictions force sequential portfolio adjustment—equity retrenchment followed by bond retrenchment—segmenting bond markets and giving U.S. Treasuries a unique role that endogenously generates the convenience yield. The model matches observed empirical facts that highlight how intermediary constraints and country size shape safe-asset premia in crisis times.