Working Papers

Capital Leakage, House Prices, and Consumer Spending: Evidence from Asset Purchase Restriction Spillovers
(with Yinglu Deng, Li Liao and Jiaheng Yu) [PDF new] [Slides new]
CFRC 2019, CICF 2019, AMES 2019, SJTU-UCL Macro Finance 2019, China Economics Summer Institute 2019, CCERSI 2019, SHUFE

We exploit plausibly exogenous spillovers from housing asset purchase restrictions in regulated cities on non-regulated cities in China to study the house price and real consequences of capital leakage across markets. Purchase restriction spillovers induce house price surges but not rent increases in the affected non-regulated cities. These spillover-driven house price surges lead to a causal increase in consumer automobile spending that (1) implies a larger housing MPC than in the United States, is (2) important in the aggregate, and (3) redistributive: Concentrated in the locals, zero for the non-locals, and U-shaped across age, consistent with predictions from Favilukis and Van Nieuwerburgh (2017).

Liquidity Constraint, Transition Dynamics, and the Chinese Housing Return Premium [PDF new version coming soon] [Slides new]
SED 2017, NBER Chinese Economy 2017, Princeton, CityUHK, PKU GSM, SAIF, SHUFE, SJTU Antai, Tsinghua SEM

Endogenous evolution in funding liquidity can drive large medium-to-long run asset price movements. In China, housing prices grew 170% during 2003–2012 in real terms. Returns on housing commanded a sustained 12% premium annually over the risk-free rate. Across Chinese cities, the relationship of the housing boom with income or population growth is weak using official or unofficial measures. However, increases in the value of housing are instead associated one-to-one with increases in household wealth, whether measured with or without housing. The same relationship is obtained instrumenting wealth growth using differences in savings rates driven by the "experience mechanism" via different exposures to the 1959-61 Great Famine across cities. This relationship motivates an explanation based on the upward transition dynamics in household wealth from a low initial condition, interacted with liquidity constraints.

Evaluated in a consumption-housing two-asset dynamic portfolio choice model with housing being priced in equilibrium, calibrated with realistic liquidity constraints and low initial wealth, this explanation explains the high housing return premium and generates the bulk of the observed aggregate increase in housing prices. Value of housing in the model is the lower of (1) the maximal sustainable level of housing value sensitive to the required rate of return (RRoR), and (2) endogenous evolution in funding liquidity driven by wealth dynamics, from a low initial condition. Housing in the model is a hedge to fundamental-driven recessions: A permanent slowdown in economic growth leads to a reduced intertemporal smoothing motive and a higher target wealth, hence housing price experience only a small temporary decrease which quickly overturns.

Global Supply Chain and Cross-Border Financing (with Jie Peng and Jing Wu) [SSRN]
INFORMS 2018, POM 2019, MSOM 2019, TWIFY 2019, CityUHK, Georgetown, GMU, GWU, HKU, MIT IDSS, Renmin University, SHUFE, Tsinghua PBCSF

Does the formation of global supply chain relationships help firms access cross-border financing in the global capital market? Comparing two firms that are otherwise similar in covariates and in pre-formation outcome through a matching difference-in-differences strategy, we observe the firm that has formed global supply chain relationships to access more cross-border financing once the global supply chain relationship is established. This result is supported empirically by all major financing vehicles, including stock cross-listing, bond issuance, bank loans, and M&A deals, and is robust to controlling for strategic disclosure concerns. Instrumenting global supply chain formation using reduction in physical trade costs yields similar results. The estimated effect of global supply chain relationship formation on cross-border financing is stronger for firms in countries with stronger accounting and ethical standards and for small and growth firms, but weaker for firms in countries with tighter capital controls and more volatile exchange rates. This suggests global supply chain formation helps cross-border financing more through information production, not cashflow relocation or re-denomination.

Bubbly Bitcoin (with Feng Dong and Zhiwei Xu) [SSRN]
AMES 2019, PHBS Workshop in Macro and Finance 2018, Guanghua FinTech Symposium, CUFE

What are the potential causes and macroeconomic consequences of Bitcoin-like cryptocurrencies? We construct a model for Bitcoin-like cryptocurrencies as a stochastic rational bubble that is costly to produce, in an infinite-horizon production economy with incomplete markets. Entrepreneurial firms choose to hold Bitcoins as liquid assets to buffer idiosyncratic investment distortions. The intrinsically worthless Bitcoins can emerge as rational bubbles only when market distortion is severe and public sentiment is optimistic enough. Bubbly Bitcoins provide market liquidity to facilitate investment in the real sector, but they also crowd out production through costly mining activities. Deterioration in market sentiment depresses Bitcoin prices but ambiguously affects aggregate output and investment. This model is consistent with the following facts: i) the surging Bitcoin market presents enormous volatility, and ii) its price dynamics are significantly sensitive to both investor sentiment and policy stances, and iii) the Bitcoin market exhibits diverse cyclical features for US and China.

Heterogeneity in Consumption Responses to Long-lasting Income Shocks [PDF]

Standard life-cycle incomplete-markets models predict large cross-sectional differences for age and wealth in agents’ consumption responses to long-lasting income shocks; whether such predictions hold in the data is an open question. Using household microdata for the US, I document statistically significant and economically important age and wealth cross-sectional heterogeneity in the the adjustment of nondurable consumption in the face of long-lasting income shocks. A calibrated standard life-cycle incomplete-markets model predicts heterogeneity in consumption responses that are quantitatively similar to empirical estimates.

Work in Progress

The Transmission of Income Inequality to Consumption Inequality: The Role of Firms (with Miao Jin, Yu-Jane Liu and Juanjuan Meng)

Using a matched firm-worker income-consumption-financials dataset from a large Asian bank, we document that within-firm income inequality translates significantly less to consumption inequality than does between-firm inequality. More proximate within-firm groups defined by income clusters or hierarchical levels display even weaker transmission. A spectral analysis indicates that a channel other than the permanent income hypothesis drive our results. Peer effects contribute to the role of firms in reducing inequality transmission but distort financial behaviors: conditioning on own income and lagged consumption, higher lagged colleague consumption predicts higher (visible) consumption, lower savings, higher debt and higher incidence of missing credit card minimum payment.