Working Papers:
"Bias and Sensitivity under Ambiguity". (joint with Zhen Huo and Marcelo Pedroni)
(Revise and Resubmit at American Economic Review.)
Abstract: This paper characterizes the effects of ambiguity aversion under dispersed information. The equilibrium outcome is observationally equivalent to a Bayesian forecast of the fundamental with additional sensitivity to signals and a pessimistic bias. This equivalence result takes a particularly simple form that allows for dynamic information and strategic interactions. It also provides a tractable computational method and enables comparative statics analysis. Applying the result, we show that ambiguity aversion helps rationalize the joint pattern between the bias and persistence of inflation forecasts conditional on household income, which we document using the survey data. In a policy game à la Barro and Gordon (1983) with an ambiguity-averse private sector, the policy rule features higher average inflation and increased responsiveness to fundamental shocks.
“Haircut Cycles”. (joint with Tong Zhang).
Abstract: We propose a macroeconomic model with financial frictions, in which the interest rate and the collateral requirement, or haircut, are jointly determined in general equilibrium. The risk and the illiquidity of the collateral are both determinants of the credit market equilibrium. In particular, an increase in risk increases the interest rate and the haircut, while an increase in illiquidity increases the haircut but decreases the interest rate. Our model allows us to evaluate the relative importance of the interest rate and the haircut for the real economy. We find that in times of high volatility and low liquidity, the financial market affects the real economy mainly through tightening collateral requirements rather than rising interest rates.
Publications:
"Heterogeneous Overreaction in Expectation Formation: Theory and Evidence". (joint with Heng Chen, Xu Li and Qian Xin).
(Forthcoming at Journal of Economic Theory). Online Appendix
Abstract: Using firm-level earnings forecasts and managerial guidance data, we construct guidance surprises for analysts, i.e., differences between managerial guidance and analysts' initial forecasts. We document new evidence on expectation formation: (i) analysts overreact to managerial guidance and the overreaction is state-dependent, i.e., it is stronger for negative guidance surprises but weaker for surprises that are larger in size; and (ii) forecast revisions are neither symmetric in guidance surprises nor monotonic. We organize these facts with a model where analysts are uncertain about the quality of managerial guidance. We show that a reasonable degree of ambiguity aversion is necessary to account for the documented heterogeneous overreaction pattern.
"Pessimism, Disagreement, and Economic Fluctuations". Journal of the European Economic Association, 2023 (Oct).
Abstract: The pessimistic bias and the cross-sectional dispersion of households' subjective beliefs heighten during recessions. We provide empirical evidence for a dominant non-inflationary aggregate demand shock that accounts for the bulk of business-cycle fluctuations not only in real quantities but also in (1) pessimism - to what degree households are more pessimistic than the rational expectation benchmark and (2) disagreement - the cross-sectional dispersion of household beliefs. To rationalize the empirical findings, this paper develops a theory of ambiguity-driven business cycles, where the Bayesian formulation of the ambiguity shock can generate positive co-movements across real quantities together with counter-cyclical pessimism and disagreement within the RBC framework. Our theory reproduces the salient features of the business cycles extended with survey data on households’ expectations. Quantitatively, the ambiguity shock alone accounts for a significant fraction of the business-cycle fluctuations in pessimism, disagreement, and real quantities.
"Tertiarization Like China". Annual Review of Economics 15, 2023.
(joint with Xilu Chen, Zheng (Michael) Song, and Fabrizio Zilibotti)
Abstract: This article documents a rapid shift toward services (tertiarization) of the Chinese economy since 2005, as evidenced by the significant increase in both employment and value-added shares of the service sector. Notably, our analysis reveals that a variety of measures of productivity growth have been greater in the service sector than in the manufacturing sector. Firm-level measures of dynamism corroborate this ongoing tertiarization trend, which is not limited to services used as inputs to industrial production but also extends to consumer services. These findings are robust across different growth accounting methodologies, including a recently proposed method by Fan et al. (2023) that addresses challenges associated with the measurement of quality improvements in service industries.
"Attention Misallocation, Social Welfare and Policy Implications". Journal of Economic Dynamics and Control, 2015, 59(Oct): 37-57.
( joint with Heng Chen and Yulei Luo) .
Abstract: We examine how agents allocate attention between private and public signals to reduce the uncertainty about observation noises when coordination is an important concern. In this setting, the attention allocation may not be monotone in endowed attention capacity. Agents may decrease their attention on or even ignore the more accurate signal when capacity increases. As a result, social welfare may decrease when they have more attention to process information. And it can be even higher when agents possess a finite amount of capacity than when they have an infinite amount of capacity. We derive sufficient and necessary conditions under which multiple equilibria emerge and study the implications of equilibrium multiplicity for macroeconomic policies.
"Bias and Sensitivity under Ambiguity". (joint with Zhen Huo and Marcelo Pedroni)
(Revise and Resubmit at American Economic Review.)
Abstract: This paper characterizes the effects of ambiguity aversion under dispersed information. The equilibrium outcome is observationally equivalent to a Bayesian forecast of the fundamental with additional sensitivity to signals and a pessimistic bias. This equivalence result takes a particularly simple form that allows for dynamic information and strategic interactions. It also provides a tractable computational method and enables comparative statics analysis. Applying the result, we show that ambiguity aversion helps rationalize the joint pattern between the bias and persistence of inflation forecasts conditional on household income, which we document using the survey data. In a policy game à la Barro and Gordon (1983) with an ambiguity-averse private sector, the policy rule features higher average inflation and increased responsiveness to fundamental shocks.
“Haircut Cycles”. (joint with Tong Zhang).
Abstract: We propose a macroeconomic model with financial frictions, in which the interest rate and the collateral requirement, or haircut, are jointly determined in general equilibrium. The risk and the illiquidity of the collateral are both determinants of the credit market equilibrium. In particular, an increase in risk increases the interest rate and the haircut, while an increase in illiquidity increases the haircut but decreases the interest rate. Our model allows us to evaluate the relative importance of the interest rate and the haircut for the real economy. We find that in times of high volatility and low liquidity, the financial market affects the real economy mainly through tightening collateral requirements rather than rising interest rates.
Publications:
"Heterogeneous Overreaction in Expectation Formation: Theory and Evidence". (joint with Heng Chen, Xu Li and Qian Xin).
(Forthcoming at Journal of Economic Theory). Online Appendix
Abstract: Using firm-level earnings forecasts and managerial guidance data, we construct guidance surprises for analysts, i.e., differences between managerial guidance and analysts' initial forecasts. We document new evidence on expectation formation: (i) analysts overreact to managerial guidance and the overreaction is state-dependent, i.e., it is stronger for negative guidance surprises but weaker for surprises that are larger in size; and (ii) forecast revisions are neither symmetric in guidance surprises nor monotonic. We organize these facts with a model where analysts are uncertain about the quality of managerial guidance. We show that a reasonable degree of ambiguity aversion is necessary to account for the documented heterogeneous overreaction pattern.
"Pessimism, Disagreement, and Economic Fluctuations". Journal of the European Economic Association, 2023 (Oct).
Abstract: The pessimistic bias and the cross-sectional dispersion of households' subjective beliefs heighten during recessions. We provide empirical evidence for a dominant non-inflationary aggregate demand shock that accounts for the bulk of business-cycle fluctuations not only in real quantities but also in (1) pessimism - to what degree households are more pessimistic than the rational expectation benchmark and (2) disagreement - the cross-sectional dispersion of household beliefs. To rationalize the empirical findings, this paper develops a theory of ambiguity-driven business cycles, where the Bayesian formulation of the ambiguity shock can generate positive co-movements across real quantities together with counter-cyclical pessimism and disagreement within the RBC framework. Our theory reproduces the salient features of the business cycles extended with survey data on households’ expectations. Quantitatively, the ambiguity shock alone accounts for a significant fraction of the business-cycle fluctuations in pessimism, disagreement, and real quantities.
"Tertiarization Like China". Annual Review of Economics 15, 2023.
(joint with Xilu Chen, Zheng (Michael) Song, and Fabrizio Zilibotti)
Abstract: This article documents a rapid shift toward services (tertiarization) of the Chinese economy since 2005, as evidenced by the significant increase in both employment and value-added shares of the service sector. Notably, our analysis reveals that a variety of measures of productivity growth have been greater in the service sector than in the manufacturing sector. Firm-level measures of dynamism corroborate this ongoing tertiarization trend, which is not limited to services used as inputs to industrial production but also extends to consumer services. These findings are robust across different growth accounting methodologies, including a recently proposed method by Fan et al. (2023) that addresses challenges associated with the measurement of quality improvements in service industries.
"Attention Misallocation, Social Welfare and Policy Implications". Journal of Economic Dynamics and Control, 2015, 59(Oct): 37-57.
( joint with Heng Chen and Yulei Luo) .
Abstract: We examine how agents allocate attention between private and public signals to reduce the uncertainty about observation noises when coordination is an important concern. In this setting, the attention allocation may not be monotone in endowed attention capacity. Agents may decrease their attention on or even ignore the more accurate signal when capacity increases. As a result, social welfare may decrease when they have more attention to process information. And it can be even higher when agents possess a finite amount of capacity than when they have an infinite amount of capacity. We derive sufficient and necessary conditions under which multiple equilibria emerge and study the implications of equilibrium multiplicity for macroeconomic policies.
