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:
A developing country that liberalizes trade chooses a date. In a three-sector model with an agricultural wage gap and manufacturing learning, opening at once is optimal when agriculture has no wage gap and opening raises no firm’s operation threshold. With the gap, the direction of trade at opening decides: an exporter of manufactures loses by waiting, an importer near its autarky price loses by opening. Calibrated to 87 economies and simulated on 83, the model finds the wage gap contributes most of the cost for early and late openers, independent of learning externalities. Opening gradually cuts the cost of mistiming.
Abstract:
This paper studies foreign exchange intervention (FXI) when trade is settled in a dominant currency. In a two-country monetary search model with flexible prices and
proportional bargaining, domestic transactions use local currency and international transactions use the dominant currency. FXI revalues dominant-currency claims, redistributing purchasing power from local-currency to dominant-currency earners at home and abroad. An anticipated intervention expands dominant-currency-earning sectors and contracts the intervener’s domestic sector; a covert one passes through partially and creates information rents. FXI is beggar-thyself rather than beggar-thyneighbor, creates no incentive for competitive devaluation under random matching, and works through the reserve leg rather than money creation. Optimal FXI is secondbest provision of dominant-currency liquidity by a government that cannot issue it. Calibrated to Taiwan, observed operations imply a welfare weight of about 0.75 on the tradable sector but a gain in that objective below 0.1 percent, so the effect is mostly distributional.
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.