I develop dynamic stochastic general equilibrium (DSGE) models where financial frictions interact with rich household/firm heterogeneity to study the implication of financial shocks for aggregate fluctuations.
Publication:
Credit Crunches, Individual Heterogeneity and the Labor Wedge, Journal of Macroeconomics, Volume 56, June 2018, Pages 65-88
Abstract
Standard neoclassical theory suggests that the marginal product of labor (MPL) should be equal to the marginal rate of substitution between consumption and leisure (MRS). Yet this is not the case in the data. Understanding the measured discrepancy between the MPL and the MRS, commonly referred as the labor wedge, is important to comprehend the limitations of economic models and thereafter improve them. The labor wedge has increased significantly during the Great Recession, but the mechanism of its variation in the credit crunch have not been well understood. This paper fills in this gap by studying the labor wedge in a quantitative general equilibrium model with collateral borrowing constraints. I find that a credit crunch can affect the labor wedge through a mechanism different from that of an exogenous TFP shock when there is endogenous entry and exit of production. With entry and exit, the tightening of the collateral constraints can cause the gap between the real wage and the MRS to increase, but the exogenous TFP shock does not have this mechanism. As a result, the labor wedge has higher increases in the credit crunch. When entry and exit is shut down, the labor wedge would have much smaller increases in the credit crunch.
Standard neoclassical theory suggests that the marginal product of labor (MPL) should be equal to the marginal rate of substitution between consumption and leisure (MRS). Yet this is not the case in the data. Understanding the measured discrepancy between the MPL and the MRS, commonly referred as the labor wedge, is important to comprehend the limitations of economic models and thereafter improve them. The labor wedge has increased significantly during the Great Recession, but the mechanism of its variation in the credit crunch have not been well understood. This paper fills in this gap by studying the labor wedge in a quantitative general equilibrium model with collateral borrowing constraints. I find that a credit crunch can affect the labor wedge through a mechanism different from that of an exogenous TFP shock when there is endogenous entry and exit of production. With entry and exit, the tightening of the collateral constraints can cause the gap between the real wage and the MRS to increase, but the exogenous TFP shock does not have this mechanism. As a result, the labor wedge has higher increases in the credit crunch. When entry and exit is shut down, the labor wedge would have much smaller increases in the credit crunch.
The Long-Run Impact of Monetary Policy and Housing-purchase Restrictions on Housing Prices in China (with Sherry Yu) International Economic Journal, 33:2, 286-309, DOI: 10.1080/10168737.2019.1610901
Abstract
This paper examines the level and volatility effect of monetary policy on housing prices in China utilizing a novel set of housing price indices constructed by Fang et. al (2015). We find that in the long-run, average housing prices react positively to inflation, money supply and bank lending growth, and negatively to the reserve requirement ratio and benchmark lending rate. Housing prices in Tier 1 cities are found to respond more sensitively to monetary shocks relative to Tier 2 and 3 cities. This result may suggest the presence of market speculation in Tier 1 cities. We further study the volatility effect of monetary shocks using the GARCH model and find that the benchmark lending rate, reserve requirement ratio and money supply growth have strong negative impact on the volatility of housing price growth. These results suggest that monetary shocks have significant level and volatility effect on housing price growth in China and policymakers should take consideration of the heterogeneous characteristics of the housing markets in the design of monetary policy. Our benchmark results remain robust after the introduction of housing-purchase restrictions policy in our estimation. In addition, we find that housing-purchase restrictions have significant negative effects on housing price growth in Tier 1 and Tier 2 cities.
Abstract
This paper examines the level and volatility effect of monetary policy on housing prices in China utilizing a novel set of housing price indices constructed by Fang et. al (2015). We find that in the long-run, average housing prices react positively to inflation, money supply and bank lending growth, and negatively to the reserve requirement ratio and benchmark lending rate. Housing prices in Tier 1 cities are found to respond more sensitively to monetary shocks relative to Tier 2 and 3 cities. This result may suggest the presence of market speculation in Tier 1 cities. We further study the volatility effect of monetary shocks using the GARCH model and find that the benchmark lending rate, reserve requirement ratio and money supply growth have strong negative impact on the volatility of housing price growth. These results suggest that monetary shocks have significant level and volatility effect on housing price growth in China and policymakers should take consideration of the heterogeneous characteristics of the housing markets in the design of monetary policy. Our benchmark results remain robust after the introduction of housing-purchase restrictions policy in our estimation. In addition, we find that housing-purchase restrictions have significant negative effects on housing price growth in Tier 1 and Tier 2 cities.
Working Papers:
Abstract
This paper studies the contraction of the U.S. economy over the Great Recession with housing market decline. I build a quantitative general equilibrium model with heterogeneous households and two sectors. Households face portfolio problems that involve selecting the stock of housing, mortgage debt and financial asset. The real house prices are endogenous and households have the options to default on mortgage debt. The model matches the housing and non-housing moments in the U.S. data such as the capital-output ratio and the mortgage foreclosure rate. I find that the combination of a negative productivity shock, a mortgage financial shock and a housing over-supply shock on the economy can explain the contractions in the aggregate economy, mortgage debt and part of the declines in house prices. In particular, the productivity shock and housing over-supply can generate large declines in house prices. Furthermore, house prices have significant spillover effects on consumption.
This paper studies the contraction of the U.S. economy over the Great Recession with housing market decline. I build a quantitative general equilibrium model with heterogeneous households and two sectors. Households face portfolio problems that involve selecting the stock of housing, mortgage debt and financial asset. The real house prices are endogenous and households have the options to default on mortgage debt. The model matches the housing and non-housing moments in the U.S. data such as the capital-output ratio and the mortgage foreclosure rate. I find that the combination of a negative productivity shock, a mortgage financial shock and a housing over-supply shock on the economy can explain the contractions in the aggregate economy, mortgage debt and part of the declines in house prices. In particular, the productivity shock and housing over-supply can generate large declines in house prices. Furthermore, house prices have significant spillover effects on consumption.
Rising Earnings Risk and Wealth Distribution with Housing (with Byoung Hoon Seok and Hye Mi You)
Abstract
Since the early 1980s, U.S. earnings risks have increased significantly, while many innovations in the U.S. housing market reduced housing transaction costs, and downpayment requirements. Using a general equilibrium incomplete-markets model with heterogeneous households, we quantify the effects of these changes in the U.S. labor and housing markets on the wealth composition between illiquid housing and liquid financial assets. We find that these changes increase the homeownership rate and the proportion of houses in household wealth among poor households, leaving housing inequality unchanged. This result is consistent with our observation around the year 2000 in the U.S. data
Abstract
Since the early 1980s, U.S. earnings risks have increased significantly, while many innovations in the U.S. housing market reduced housing transaction costs, and downpayment requirements. Using a general equilibrium incomplete-markets model with heterogeneous households, we quantify the effects of these changes in the U.S. labor and housing markets on the wealth composition between illiquid housing and liquid financial assets. We find that these changes increase the homeownership rate and the proportion of houses in household wealth among poor households, leaving housing inequality unchanged. This result is consistent with our observation around the year 2000 in the U.S. data