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Working Paper
Targeted Reserve Requirements for Macroeconomic Stabilization
Liu, Zheng; Spiegel, Mark M.; Zhang, Jingyi (2023-11-22)
We study the effectiveness of targeted reserve requirements (RR) as a policy tool for macroeconomic stabilization. Targeted RR adjustments were implemented in China during both the 2008-09 global financial crisis and the recent COVID-19 pandemic. We develop a model in which firms with idiosyncratic productivity can borrow from two types of banks—local and national—to finance working capital. National banks provide better liquidity services, while local banks have superior monitoring technologies. Switching lenders incurs a fixed cost, such that firms switch lenders only under sufficiently ...
Working Paper Series , Paper 2023-13

Journal Article
Uncertainty, unemployment, and inflation
Liu, Zheng; Leduc, Sylvain (2012)
Heightened uncertainty acts like a decline in aggregate demand because it depresses economic activity and holds down inflation. Policymakers typically try to counter uncertainty's economic effects by easing the stance of monetary policy. But, in the recent recession and recovery, nominal interest rates have been near zero and couldn't be lowered further. Consequently, uncertainty has reduced economic activity more than in previous recessions. Higher uncertainty is estimated to have lifted the U.S. unemployment rate by at least one percentage point since early 2008.
FRBSF Economic Letter

Working Paper
Capital controls and optimal Chinese monetary policy
Spiegel, Mark M.; Chang, Chun; Liu, Zheng (2013)
We examine optimal monetary policy under prevailing Chinese policies> ? including capital controls, nominal exchange rate targets, and costly sterilization of foreign capital inflows. China?s combination of capital controls and exchange rate pegs disrupts its monetary policy, precluding adjustments that could maintain macroeconomic stability following a set of shocks that mirror its experience during the global financial crisis. However, comparing different policy regimes in a consistent DSGE framework, we find that the bulk of welfare gains achieved under full liberalization can be obtained ...
Working Paper Series , Paper 2012-13

Journal Article
Boomer retirement: headwinds for U.S. equity markets?
Spiegel, Mark M.; Liu, Zheng (2011)
Historical data indicate a strong relationship between the age distribution of the U.S. population and stock market performance. A key demographic trend is the aging of the baby boom generation. As they reach retirement age, they are likely to shift from buying stocks to selling their equity holdings to finance retirement. Statistical models suggest that this shift could be a factor holding down equity valuations over the next two decades.
FRBSF Economic Letter

Working Paper
Will AI Intensify or Weaken Market Competition?
Firooz, Hamid; Leduc, Sylvain; Liu, Zheng (2026-08-10)
We study how AI affects market competition based on a general equilibrium framework with heterogeneous firms facing idiosyncratic productivity and variable markups. Firms choose the AI technology subject to fixed costs, where AI production requires data and energy inputs. Our model predicts a non-monotonic relation of AI diffusion with industry concentration. As AI usage rises from an initially low level, large incumbent users gain market share. When AI usage is sufficiently diffused, entry of new and smaller adopters erodes the market share of incumbents, reducing industry concentration. The ...
Working Paper Series , Paper 2026-15

Working Paper
Bank Risk-Taking and Monetary Policy Transmission: Evidence from China
Xu, Zhiwei; Li, Xiaoming; Peng, Yuchao; Liu, Zheng (2020-08-03)
We present evidence that monetary policy easing reduces bank risk-taking but exacerbates capital misallocation in China after implementing the Basel III capital regulationsin2013. Thenewregulationstightenedbankcapitalrequirementsandintroduced a new risk-weighting approach to calculating the capital adequacy ratio (CAR). To meet tightened capital requirements, a bank can boost its eﬀective CAR by raising capital or by increasing the share of lending to low-risk borrowers. Using conﬁdential loan-level data from a large Chinese commercial bank, merged with ﬁrm-level data on a large set of ...
Working Paper Series , Paper 2020-27

Journal Article
Do Households Expect Inflation When Commodities Surge?
Glick, Reuven; Kouchekinia, Noah; Liu, Zheng; Leduc, Sylvain (2021-07-12)
Household surveys indicate that consumers expect higher inflation this year than in recent years, as the U.S. economy rebounds from the deep recession. This has coincided with a surge in commodity prices, as strong demand for goods like gas, food, and construction materials is catching producers with low supplies. Evidence suggests that households respond to commodity price increases by raising their expectations of future inflation. However, since surges in commodity prices are transitory, their effects on inflation expectations—particularly long-term expectations—are modest and ...
FRBSF Economic Letter , Volume 2021 , Issue 19 , Pages 06

Journal Article
Does headline inflation converge to core?
Weidner, Justin; Liu, Zheng (2011)
Recent surges in food and energy prices have pushed up headline inflation to levels well above its underlying trend. In contrast, core inflation, which excludes food and energy prices, has remained low and stable. Historical data suggest that, since the early 1990s, headline inflation has tended to converge toward core inflation. Thus, high inflation is unlikely to persist as long as inflation expectations remain anchored.
FRBSF Economic Letter

Discussion Paper
Chain of production as a monetary propagation mechanism
Liu, Zheng; Huang, Kevin X. D. (1999)
This paper studies a general equilibrium model with multiple stages of production and asynchronized price setting that provides a new explanation for the observed persistent real effects of monetary shocks. The key feature of the model is a vertical chain-of-production structure. In this model, the effects of monetary shocks on price adjustment are gradually dampened via the interactions of firms through their input-output relations and the timing of their price decisions. The model predicts that prices adjust by a smaller amount and less rapidly at later stages than at earlier stages, which ...
Discussion Paper / Institute for Empirical Macroeconomics , Paper 130

Journal Article
Capital Flow Surges and Rising Income Inequality
Diwan, Renuka; Liu, Zheng; Spiegel, Mark M. (2021-03-29)
Surges of foreign investment into developing countries can amplify economic stress and potentially undermine their financial stability. New evidence suggests that excessive foreign capital inflows can also increase income inequality in emerging economies. Research shows that, as low global interest rates trigger more investment, those inflow surges benefit entrepreneurs by raising their returns, while lowering household earnings on bank deposits within the countries. The potential impact on income inequality provides another reason beyond financial stability for resisting abrupt surges in ...
FRBSF Economic Letter , Volume 2021 , Issue 09 , Pages 01-05

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