Working Papers
Financial Accelerator with Rational Inattention, joint with Jieran Wu link
Abstract:
How do financial constraints affect firms’ information acquisition and, thus, the transmission of monetary policy? This paper addresses these questions in a rational inattention model with heterogeneous firms and endogenous financial friction. Due to strategic complementarity in pricing, firms with binding financial constraints pay more attention to aggregate monetary shock than unconstrained ones. Heterogeneity in attention allocation implies heterogeneity in price responsiveness. Consequently, monetary policy becomes less effective during recessions as financial friction increases. We characterize firms’ heterogeneous attention to macroeconomic conditions and the state-dependent transmission of monetary policy in a simple theoretical setting, and quantify the aggregate implications of these features in a calibrated dynamic model, which are consistent with the empirical evidence documented in this paper.
Endogenous Liquidity of Financial Assets and Macroeconomic Implications, joint with Li Li
Abstract:
One decade after the financial crisis of 2007-2008, the cause of this crisis is still in debate. This paper studies the endogenous liquidity of assets in a closed economy and characterizes a general, non-parametric mechanism of economic fluctuations, including severe crises. We endogenize liquidity in the following aspects: (i) new construction of the liquidity property of assets; (ii) liquidity-augmented asset pricing; (iii) liquidity creation and evolution in the financial market. We derive asset pricing with consideration of liquidity and show that asset prices, augmented by liquidity service, inflate with liquidity premium and induce distorted investments in the real economy. Securities, which are widely used to facilitate transactions, induce new issuance and inevitably lower the pecuniary yields of the physical capital that backs them. The consequence is that asset prices and privately created liquidity become fragile, in the sense that small shocks can lead to large drops in asset prices and damage balance sheets of financial intermediaries. According to this theory, asset prices and liquidity play a central role; this points to the importance of stabilizing asset prices, not only commodity prices. We analyze the associated policies in recessions that can be conducted by fiscal and monetary authorities. The present theory is consistent with the classic wisdom before the second world war.
Work in Progress
Firm Information Acquisition and Industry Concentration
Abstract:
Industry concentration has been continuously raising in the last 50 years. Meanwhile, superstar firms are also enriching their arsenal with information analysing technology and human resources regarding big data, artificial intelligence, etc. I provide a model to rationalise the superstar firm phenomenon from rational inattention perspective. In an economy with variable markup and fixed initial information processing capacity, more productive firms pay more attention to idiosyncratic uncertainty due to their smaller counter-cyclical markup elasticity, which is consistent with recent empirical findings. Once all firms have sufficient profits to pay a fixed cost (e.g., building a new department to adopt new data technology) and start improving information processing capacity, more productive firms will have more incentive to invest in tracking both idiosyncratic and aggregate uncertainty, which lead to absolute lower profit loss due to both kinds of uncertainties. Therefore, in the later stage, more productive firms keep adopting new data/information technology and become superstar firms, equipped with higher information processing capacity.
"Rational" Finite Planning Horizon, joint with Dmitriy Sergeyev and Luigi Iovino