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:
This paper argues that the growth effect of trade reform depends on when a country opens relative to its stage of manufacturing development. 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 until sufficient capability has accumulated. Premature opening exposes domestic manufacturing to import competition, causing firm exit, slower organizational capital accumulation, and delayed productivity growth. Calibrating the model to 75 low- and lower-middle-income countries observed from 1991 to 2020, I find that the welfare cost of mistimed liberalization is highly concentrated within a small group whose manufacturing sectors were too weak to survive competition at accession would have gained substantially from waiting. The concentration of these stakes is robust to how strictly optimality is
defined. The optimal liberalization date is pinned down by the stock of domestic manufacturing capability rather than by the calendar, and timing is decisive precisely for the countries least prepared for global competition.
Abstract:
This paper studies the real effects of foreign exchange intervention (FXI) when international trade is settled in a dominant currency. I develop a two-country monetary search model with flexible prices in which domestic transactions use local currency while international transactions use the dominant currency. FXI operates by changing the relative purchasing power of settlement balances rather than through sticky-price expenditure switching. A reserve purchase depreciates the local currency and raises the value of dominant-currency balances, redistributing wealth from local-currency holders to dominant-currency holders at home and abroad. When anticipated, the intervention expands dominant-currency-earning sectors and contracts the intervener’s domestic sector. When only domestic agents are informed, exports do not expand; informed exporters instead earn information rents from uninformed foreign buyers. The model reverses several benchmark predictions: FXI is beggar-thyself rather than beggar-thy-neighbor, creates no incentive for competitive devaluation, and works through the reserve-purchase leg rather than money creation. Optimal-policy analysis interprets FXI as second-best provision of dominant-currency liquidity by a government that cannot issue the dominant currency.
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.