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Journal Article
Average Inflation Targeting in a Low-Rate Environment
One significant change in the US economy in the last 20 years is the trend decline in real interest rates that pushes the policy rate near the effective lower bound (ELB) and puts downward pressure on inflation. This environment leaves conventional monetary policy tools less effective in accommodating adverse shocks. To better achieve the Federal Reserve’s dual mandate at the ELB, the FOMC adopted a new framework called average inflation targeting (AIT). In this Commentary, I demonstrate that AIT is a better policy in a low-rate environment because of its ability to anchor inflation ...
Working Paper
A Comment on 'Wealth Inequality and Endogenous Growth' by Byoungchan Lee
How does wealth inequality affect economic growth? Byoungchan Lee answers this question by developing a heterogeneous-agent model and augmenting it with endogenous firm innovation. The novel channel is that rising wealth concentration reduces aggregate demand, which gives firms a disincentive to spend on R&D and therefore leads to slower productivity growth. In this discussion, we first explain the difference in calibration strategy between Lee’s approach and the common approach in the literature, and then discuss its quantitative implications for the effect of rising inequality on ...
Working Paper
Firm Dynamics and SOE Transformation During China's Economic Reform
We study China’s state-owned enterprises (SOE) reform with a focus on the corporatization of SOEs. We first empirically document that small SOEs are more likely to exit or become privatized, whereas big SOEs are more likely to be corporatized while remaining under state ownership. We then build a heterogeneous-firm model featuring financial frictions, endogenous entry and exit, and optimal firm-type choices. Our calibrated model suggests that in the long run, the SOE reform increases the aggregate output by facilitating resource reallocation to the private sector. Along the transition, the ...
Journal Article
Monetary Policy since the Onset of the COVID-19 Pandemic: A Path-Dependent Interpretation
Some argue that the Fed underreacted to rising inflation in 2021 after the US economy started to recover from the COVID-19 crisis. By using data from the Summary of Economic Projections (SEP), we surmise that the FOMC expected to keep the federal funds rate near zero by the end of 2021, but at the same time, the committee also expected to make the policy rate catch up to inflation over the next two years. We then argue that the Fed chose this gradual approach in response to the negative demand shock that pushed the policy rate to its effective zero lower bound. Economic literature on optimal ...
Working Paper
The Informational Effect of Monetary Policy and the Case for Policy Commitment
I study how the informational effect of monetary policy changes the optimal conduct of monetary policy. In my model, the private sector extracts information about unobserved shocks from the central bank's interest rate decisions. The central bank optimally changes the informational effect of the interest rate by committing to a state-contingent policy rule, in which case the Phillips curve becomes endogenous to the central bank's optimization problem. In a dynamic model, the optimal policy rule overshoots the natural-rate shock and gradually responds to the cost-push shock, which makes the ...
Working Paper
Rising Skill Supply, Technological Changes, and Innovation: A Quantitative Exploration of China
Can the expansion of higher education lead to firm productivity growth? In this paper, we examine how China's college expansion program contributes to the rapid growth of firms' R&D expenditure and productivity. In our model, heterogeneous firms make endogenous R&D decisions, requiring them to allocate skilled workers between production and R&D. We structurally estimate the model using firm-level data on the level and distribution of R&D, as well as macro-level data on skill prices and sectoral allocation. Quantitative analysis reveals that between 2004 and 2018, the combination of the ...
Journal Article
Forward Guidance during the Pandemic: Has It Changed the Public’s Expectations?
In responding to the COVID-19 crisis, the Federal Reserve has both lowered the federal funds rate and provided forward guidance. We study whether the forward guidance given with the April and June 2020 FOMC meetings altered the public’s expectations of future policy rates, GDP growth, and inflation. We find that forward guidance was effective in altering the public’s expectations about future policy rates if it was accompanied by an SEP but not expectations about economic fundamentals. We suggest that the difference might be explained by FOMC statements being interpretable in two ...
Working Paper
How Important Is the Information Effect of Monetary Policy?
Is the "information effect" of monetary policy quantitatively important? We first use a simple model to show that under asymmetric information, monetary policy surprises are correlated with the unobserved state of the economy. This correlation implies that monetary policy surprises provide information about the state of the economy, and at the same time, explains why the estimation of the information effect may be biased. We then develop a New Keynesian DSGE model under asymmetric information and calibrate model parameters to match macroeconomic dynamics in the US and forecasting accuracy in ...
Working Paper
Firm Dynamics and SOE Transformation During China’s Economic Reform
We study the reform of China’s state-owned enterprises (SOE) with a focus on the corporatization of SOEs. We first document the empirical patterns of the "grasp the large and let go of the small" policy. To quantify the implications of the reform for aggregate output and TFP, we build a three-sector firm dynamics model featuring financial frictions and endogenous firm-type choices. Our calibrated model shows that the SOE reform can increase long-run TFP by encouraging the exit of the least efficient firms in the state sector, but the magnitude of TFP growth also depends on the efficiency in ...
Working Paper
Forward Guidance under Imperfect Information: Instrument Based or State Contingent?
I study the optimal type of forward guidance in a flexible-price economy in which both the private sector and the central bank are subject to imperfect information about the aggregate state of the economy. In this case, forward guidance changes the private sector?s expectations about both future monetary policy and the state of the economy. I study two types of forward guidance. The first type is instrument based, in which case the central bank commits to a value of the policy instrument. The second type is state contingent, in which case the central bank reveals its imperfect information and ...