Research

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.

Abstract: 

What is the optimal timing for a low-income country to liberalize trade? Is the gain from trade large enough for a low-income country to give up the opportunity to develop industries at their early stages? To address these questions, I construct a three-sector model in which the manufacturing sector features spillovers in productivity growth and organizational capital enhancement via technology choice, and the government chooses when to liberalize trade. In addition to the static gain from trade and the dynamic cost of giving up an infant industry, this paper contributes to the literature by highlighting one more dynamic cost: the time required to rebuild the manufacturing production capacity. Empirically, I find that the manufacturing sector plays a key role in driving economic growth, and faster GDP growth is associated with a larger worker inflow in the manufacturing sector for low-income countries after their World Trade Organization (WTO) accession. The calibration exercise shows that 80.5% (62 out of 77) of my sample countries can improve the welfare of the household by postponing the timing of WTO accession. Among these 62 countries, the median difference to optimal timing is 8 years and the median consumption equivalent variation under optimal liberalization timing is 0.0856%.

Abstract: 

In this paper, I construct a two-country model to reexamine the effect of foreign exchange interventions from a home country when all international trade is flexibly priced in foreign country's currency. The result has two significant policy implications when home country depreciates its own currency against the foreign currency through foreign exchange interventions. Firstly, there is a decrease in prices and an increase in quantities for exports from both countries when interventions are anticipated, which implies intervention is not harmful to exporters in foreign country. Secondly, there is a wealth redistribution from the domestic sector in home country to the rest of the world, making it the only sector hurt by foreign exchange interventions. In the calibration exercise, I find the domestic price increase by 0.34% and the wealth of domestic sector in Taiwan reduces by 0.2143% of real GDP if the central bank in Taiwan increases US reserves purchase by 1% and finances the purchase by seigniorage.

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.