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Working Paper
Land-price dynamics and macroeconomic fluctuations
Zha, Tao; Wang, Pengfei; Liu, Zheng (2011)
We argue that positive comovements between land prices and business investment are a driving force behind the broad impact of land-price dynamics on the macroeconomy. We develop an economic mechanism that captures the comovements by incorporating two key features into a DSGE model: we introduce land as a collateral asset in firms' credit constraints, and we identify a shock that drives most of the observed fluctuations in land prices. Our estimates imply that these two features combine to generate an empirically important mechanism that amplifies and propagates macroeconomic fluctuations ...
FRB Atlanta Working Paper , Paper 2011-11

Working Paper
Land Prices and Unemployment
Zha, Tao; Miao, Jianjun; Liu, Zheng (2013)
We integrate the housing market and the labor market in a dynamic general equilibrium model with credit and search frictions. The model is confronted with the U.S. macroeconomic time series. Our estimated model can account for two prominent facts observed in the data. First, the land price and the unemployment rate tend to move in opposite directions over the business cycle. Second, a shock that moves the land price is capable of generating large volatility in unemployment. Our estimation indicates that a 10 percent drop in the land price leads to a 0.34 percentage point increase of the ...
Working Paper Series , Paper 2013-22

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

Journal Article
Can Monetary Policy Tame Rent Inflation?
Liu, Zheng; Pepper, Mollie (2023-02-13)
Rent inflation has surged since early 2021. Because the cost of housing is an important component of total U.S. consumer spending, high rent inflation has contributed to elevated levels of overall inflation. Evidence suggests that, as monetary policy tightening cools housing markets, it can also reduce rent inflation, although this tends to adjust relatively slowly. A policy tightening equivalent to a 1 percentage point increase in the federal funds rate could reduce rent inflation as much as 3.2 percentage points over 2½ years.
FRBSF Economic Letter , Volume 2023 , Issue 04 , Pages 6

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

Journal Article
Is GDP Overstating Economic Activity?
Tallman, Eric; Spiegel, Mark M.; Liu, Zheng (2018)
Since late 2015, growth in real GDP has consistently exceeded that in real GDI, a prominent alternative measure of aggregate output, with an average difference of about 0.65 percentage point. Is real GDP overstating the expansion? One way to address this question is by comparing the accuracy of these measures in forecasting a benchmark measure of economic activity, the Chicago Fed National Activity Index. The comparison suggests that GDP consistently outperforms GDI in predicting recent real economic activity. Therefore, the weaker GDI growth does not necessarily indicate slower economic ...
FRBSF Economic Letter

Journal Article
Slow Credit Recovery and Excess Returns on Capital
Tai, Andrew; Liu, Zheng (2016)
During the recovery from the Great Recession, real interest rates on government securities have stayed low, but real returns on capital have rebounded. Although this divergence is puzzling in light of standard economic theory, it can be explained by credit market imperfections that raise the cost of capital and depress aggregate investment. The unusually slow credit market recovery is likely to have contributed to the diverging paths of the risk-free rate and returns on capital. It may have also contributed to a slow recovery in investment and output.
FRBSF Economic Letter

Working Paper
Asymmetric expectation effects of regime shifts and the Great Moderation
Zha, Tao; Waggoner, Daniel F.; Liu, Zheng (2007)
We assess the quantitative importance of the expectation effects of regime shifts in monetary policy in a DSGE model that allows the monetary policy rule to switch between a ?bad? regime and a ?good? regime. When agents take into account such regime shifts in forming expectations, the expectation effect is asymmetric across regimes. In the good regime, the expectation effect is small despite agents? disbelief that the regime will last forever. In the bad regime, however, the expectation effect on equilibrium dynamics of inflation and output is quantitatively important, even if agents put a ...
Working Papers , Paper 653

Working Paper
Uncertainty shocks are aggregate demand shocks
Liu, Zheng; Leduc, Sylvain (2012)
We study the macroeconomic effects of uncertainty shocks in a DSGE model with labor search frictions and sticky prices. In contrast to a real business cycle model, the model with search frictions implies that uncertainty shocks reduce potential output, because a job match represents a long-term employment relation and heightened uncertainty reduces the value of a match. In the sticky-price equilibrium, an uncertainty shock--regardless of its source--consistently acts like an aggregate demand shock because it raises unemployment and lowers inflation. We present empirical evidence--based on a ...
Working Paper Series , Paper 2012-10

Working Paper
Should the central bank be concerned about housing prices?
Jeske, Karsten; Liu, Zheng (2010)
Housing is an important component of the consumption basket. Since both rental prices and goods prices are sticky, the literature suggests that optimal monetary policy should stabilize both types of prices, with the optimal weight on rental inflation proportional to the housing expenditure share. In a two-sector DSGE model with sticky rental prices and goods prices, however, we find that the optimal weight on rental inflation in the Taylor rule is small?much smaller than that implied by the housing expenditure share. Since production of housing services uses the stocks of housing intensively, ...
Working Paper Series , Paper 2010-05

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