Publication
Abstract:
We construct a monetary model in which entrepreneurs facing uncertainty in input costs and returns of projects may finance investment internally and with bank credit. Entrepreneurs using money as a down payment and bonds as collateral can reduce the default probability. Working through these key channels, lower nominal policy rates and open market sales can reduce the real lending rate. The central bank’s private asset purchases improve availability of credit and compress risk spreads. Our model identifies the risk-reducing channel of private asset purchases—the policy functions as if the government had supplied more bonds, and the increased collateralizable bonds are allocated more to corporate borrowings with a higher lending risk. Risk-retention requirements associated with asset purchases are essential to welfare. As uncertainty with respect to input costs and investment returns intensifies, the central bank should lower the optimal risk-retention rate to encourage lending and reduce business failures.
Working Papers
Abstract:
I develop a three-sector structural transformation model with organizational capital and argue that premature trade liberalization damages the manufacturing sector and deters long-run growth. Premature liberalization causes massive manufacturing firm withdrawal and organizational capital depletion, magnifying the cost of premature reform. Calibrating the model to 77 low-income countries, I find that more than 80 \% would have been better off delaying World Trade Organization (WTO) accession, with an average optimal delay of 20 years. Quantitatively, organizational capital accumulation is the most decisive factor for liberalization timing. The results highlight that liberalizing “too soon” undermines industrialization and that the right reform at the wrong time can be as damaging as no reform at all.
Abstract:
Why have trade reforms failed to generate sustained growth in many low-income countries? This paper argues that timing is crucial. I develop a three-sector structural transformation model in which manufacturing production accumulates organizational capital through learning by doing. The model implies a state-contingent liberalization rule: countries with comparative advantage in manufacturing benefit from opening immediately, while countries without such advantage may gain from delaying liberalization. Premature opening exposes domestic manufacturing to import competition, causing firm exit, slower organizational capital accumulation, and delayed productivity growth. Calibrating the model to 77 low- and lower-middle-income countries observed from 1991 to 2020, I find that about 82 percent would have increased welfare by delaying WTO accession, with an average consumption-equivalent gain of 9.22 percent. The results suggest that the gains from openness depend not only on trade barriers, but also on whether domestic production capability has developed before exposure to global competition.
Abstract:
This paper studies the real effects of foreign exchange intervention (FXI) under the dominant currency paradigm. I develop a central-periphery monetary search model in which domestic transactions are settled in local currency while international transactions are settled in dominant currency, and prices are flexible. In this environment, FXI works by changing the relative purchasing power of currencies rather than through the standard sticky-price expenditure-switching channel. A depreciation implemented through reserve purchases redistributes purchasing power away from local-currency holders in the intervening country and toward dominant-currency holders at home and abroad. When intervention is anticipated, this redistribution feeds back into production decisions: sectors earning dominant currency expand, while the domestic sector in the intervening country contracts. Under asymmetric information, FXI also creates expenditure switching across exporters and may generate incentives for competitive devaluation.
Work in progress
Abstract:
This paper examines the role of state-owned businesses in financing monetary policy and their implications for inflation and welfare. Building on a typical cash-in-advance model, I analyze different government revenue sources—lump-sum taxes, state-owned business profits, labor taxes, and output taxes—to study their impact on monetary policy effectiveness. I find that the government should implement the Friedman Rule if the lump-sum tax is available. However, when the lump-sum tax is unavailable, output tax should be the second option to finance deflation. Interestingly, when the government can only rely on state-owned business profits, labor taxes, or output taxes, the first-best allocation becomes unattainable, and deflation is generally undesirable. Finally, among these alternatives, output taxation minimizes distortions in a positive inflation regime. The findings highlight the importance of considering fiscal constraints when formulating monetary policy, as the method of government financing significantly affects economic efficiency and welfare.
Abstract:
This paper examines a Taiwanese size-dependent tax audit rule that allows firms with annual revenue below a threshold to simplify the tax-filing process and be exempt from tax audits. We aim to quantify the importance of considering the policy distortion on firm dynamics. Using the manufacturing operation census, we observe that firms decelerate their revenue growth rates when approaching the policy threshold from below, with labor inputs being more flexibly adjusted than capital in response to the policy. Moreover, the slowdown pattern is more salient for younger firms. As for the extensive margin, we show that the entrant share below the threshold is significantly higher. We employ a firm dynamics model where firms grow through frictional capital accumulation and flexible labor adjustment, and they make entry and exit decisions based on expected continuation values. To rationalize the young-old differentials, firms in the model learn about their true ability over time. The simulation results assure the model's ability to generate the distorted firm size distribution; we further find that a static model understates the policy's negative impact by 23\%, shedding light on the importance of firm dynamics when evaluating size-dependent tax policies.