Working Papers
Currency Pegs, Trade Imbalances and Unemployment: A Reevaluation of the China Shock
(joint with Bumsoo Kim and Masao Fukui)
Abstract: We study how the interaction between China’s productivity growth and currency peg to the US dollar affected manufacturing decline, unemployment, trade deficit and overall welfare in the United States. Empirically, we document that in response to similar surges in Chinese exports, countries pegging to the US dollar experienced larger unemployment and trade deficits compared to floating countries. Theoretically, we develop a dynamic model of trade featuring endogenous imbalances and nominal rigidity that is consistent with the previous evidence. We show that Foreign growth may hurt Home welfare and characterize optimal trade and monetary policy in this environment. Quantitatively, we find that China’s currency peg is responsible for 447 thousand manufacturing jobs lost in the US over 2000-2012, 1.3% (% GDP) of the US trade deficit in the same period, and reduces US lifetime welfare gains from Chinese growth by 32% compared to an economy where an otherwise identically growing China had its currency floating, though the welfare impact of the China shock remains positive. We find that a short-run safeguard tariff may have been effective in accommodating China’s currency peg and ameliorating the labor market distortions.
Work in Progress
Local inflation and income redistribution: evidence from tax data from 1969 to the present
(joint with Stavros Panageas, Dimitris Papanikolaou, John Rothbaum, Lawrence Schmidt)
Abstract: In many macroeconomic models, especially those with perfect risk sharing, many unexpected changes in inflation are "good" states, associated with a low marginal value of wealth. However, this representative agent view neglects the fact that inflation has the potential to induce very large redistribution of both income and wealth across different individuals in the population. We explore the relationship between inflation and risk-sharing, leveraging spatial variation and newly uncovered, population-level, panel income tax records from the US which date back to 1969, including the period of the Great Inflation. We find how income growth exposure to inflation varies over the income or age distribution of households. Results are pending to disclosure clearing.
Model (non-)disclosure in supervisory stress tests
(joint with Bumsoo Kim and Ying Gao)
Abstract: We study the Federal Reserve's problem of disclosing the models it uses in supervisory stress tests of large banks. Banks argue that nondisclosure leads to inefficiencies stemming from uncertainty, but regulators are concerned that full disclosure can lead to banks gaming the system. We formalize the intuition behind this trade-off in a stylized model where both the regulator and banks have imperfect, private ``models" about a risky asset, and the regulator uses its own model to `stress test' the investment. We show that if the regulator uses its model to test the banks' investment, full disclosure is suboptimal, and the regulator may benefit from hiding the model when the bank's model is more precise than the regulator's own model. The key idea is that hiding the regulator's model forces the bank to guess it using the bank's own models, effectively eliciting the bank's private information. We also show that if the regulator can fine-tune disclosure policies, the regulator can approximately enforce the first-best action of banks, as if the regulator fully knew all the private information held by banks. The intuition is closely related to the Cremer and McLean (1988) information rent extraction result.
Phillips Curve and Optimal Monetary Policy Targets under Imperfect Labor Reallocation
(joint with Bumsoo Kim and Masao Fukui)
Abstract: This paper studies optimal monetary policy in a multisector economy with endogenous, costly reallocation of workers across sectors. We first provide a sufficient condition for which labor relocation does not affect aggregate inflation – depending on the Domar weights and labor share of each sector. When this condition fails to hold, sector reallocation may create additional inflationary pressure, or deflationary pressure in response to shocks. Turning to optimal policy, the central bank no longer has one “output gap” to target when there are multiple labor types, and it faces a trade-off across aggregate inflation, relative price distortion, and relative output gaps across sectors. We use this framework to investigate the effectiveness of alternative monetary policy targets, both analytically and numerically.
DGP-Agnostic Dynamic Programming via Reinforcement Learning
(joint with Tim de Silva)
Abstract: Traditional dynamic programming requires a mathematical model of the transition function of the state. Using Reinforcement Learning techniques, we develop a framework that allows more general transition functions. The modeler does not need to know the transition function as long as it can simulate realizations of it or observe realizations from data. We apply it to the income fluctuations problem. First, we show that the agent is able to learn the process and achieve the same value as the traditional method. Next, we quantify the miss optimization loss of assuming the income process is an AR1 but instead feeding the process with real income realizations.
Wage posting and preference heterogeneity
Abstract: Both wage posting and idiosyncratic preference heterogeneity are common sources of monopsony power but interpreted independently. While both forces, in separate, lead to higher labor market power from firms, its interaction implies an increase of wage inequality. The inclusion of preference heterogeneity induces low productivity firms to reduce wages, waiting for workers that derive high utility from working with them, and raises wages of high productivity firms, since now workers can be poached from lower ranked firms. An implication of the model is that welfare inequality is lower than wage inequality.