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Department of Economics

Hong Kong University of Science and Technology


Pengfei Wang


My research fields are: macroeconomics, monetary economics and financial economics. My main research areas are:

·        Interaction between market frictions (borrowing constraints, uninsurable idiosyncratic risk, adjustment costs, and taxation)  and heterogeneity (heterogeneous households/firms ) in general equilibrium

·        Self-fulfilling prophecy due to endogenous markup, imperfect information or financial frictions

·        Asset pricing in production economies in general and asset bubbles in particular

·        Nominal rigidities

·        Inventory dynamics

For a summary of my current research, please see my Research Statement.

Google Scholar Profile


1. Financial Markets, the Real Economy, and Self-fulfilling Uncertainties, with Jess Benhabib and Xuewen Liu, PDF, Forthcoming: Journal of Finance.

2. Monetary Policy and Rational Asset Bubbles: Comments, with Jianjun Miao and Zhouxiang Shen, PDF, Forthcoming: American Economic Review.

3. Saving China’s Stock Market, with Jianjun Miao and Yi Huang, PDF, Forthcoming: IMF Economic Review.

4. Convergence, Financial Development, and Policy Analysis, with Justin Yifu Lin and Jianjun Miao, PDF, Forthcoming: Economic Theory.

5. The Peril of Credit Boom, with Jianjun Miao and Feng Dong,  PDF, Economic Theory, December 2018, 66(4), pp 819–861.

6. Market Thickness and the Impact of Unemployment on Housing Market Outcomes, with Li Gan and Qinghua Zhang, PDF, Journal of Monetary Economics, October 2018, pp. 27-49.

7. Bubbles and Credit Constraints, with Jianjun Miao, PDF, American Economic Review, September, 2018, 108(3), pp. 2509-2628.

8. Trade, Sectorial Reallocation and Growth, with Danyang Xie,  PDF, Forthcoming: Annals of Economics and Finance, May, 2018, 19(1), pp. 49-74.

9. Adverse Selection and Self-fulfilling Business Cycles, with Jess Benhabib and Feng Dong   PDF, Journal of Monetary Economics, April 2018, pp. 114-130.

10.             Financial Development and long-run Volatility Trend, with Zhiwei Xu and Yi Wen,  PDF, Review of Economic Dynamics, April 2018, 28, pp.221-251.

11.             Two-Way Capital Flows and Global Imbalances, with Zhiwei Xu and Yi Wen, Economic Journal, February 2017, 127(599), pp.229-269.

12.             Endogenous Information Acquisition and Countercyclical Uncertainty, with Jess Benhabib and Xuewen Liu,  PDF, Journal of Economic Theory, September 2016, 165, pp. 601-642.

13.             Sentiments, Financial Markets, and Macroeconomic Fluctuations, with Jess Benhabib and Xuewen Liu  PDF,  Forthcoming: Journal of Financial Economics, May 2016, 120(2), pp.420-443.

14.             Credit Search and Credit Cycles, with Feng Dong and Yi Wen, PDF, Forthcoming: Economic Theory, February 2016, 61(2), pp. 215-239.

15.             Stock Market Bubbles and Unemployment, with Jianjun Miao and Lifang Xu,  PDF, Economic Theory, February 2016, 61(2), pp. 273-307.

16.             Chaotic Banking Crises and Banking Regulations, with Jess Benhabib and Jianjun Miao, PDF, Economic Theory, January 2016, 61(2), pp.393-422..

17.             Housing Bubbles and Policy Analysis, with Jianjun Miao and Jing Zhou  PDF,  Journal of Monetary Economics, 2015, 76, pp.57-70.

18.             A Bayesian DSGE Model of Stock Market Bubbles and Business Cycles,  with Jianjun Miao and Zhiwei Xu,  PDF, Quantitative Economics, 2015, 6(3), pp.599-635.

19.             Banking Bubbles and Financial Crisis, with Jianjun Miao, PDF, Journal of Economic Theory, 2015, 157, pp.763-792.

20.             Sentiments and Aggregate Demand Fluctuations, with Jess Benhabib and Yi Wen, PDF, Econometrica, 2015, 83(2), pp.549-585.

21.             Private Information and Sunspots in Sequential Asset Market, with Jess Benhabib,  PDF, Journal of Economic Theory, 2015, 148, pp558-584.

22.             What Inventories Tell us about Aggregate Fluctuations—A Tractable Approach to (S,s) Policies, PDF, with Yi Wen and Zhiwei Xu, Journal of Economic Dynamics and Control, 2014, 44, pp. 196-217.

23.             Sectoral Bubbles and Endogenous Growth, with Jianjun Miao, PDF, Journal of Mathematical Economics, 2014, pp. 153-163.

24.             Lumpy Investment and Corporate Tax Policy, with Jianjun Miao, PDF, Journal of Money, Credit, and Banking, 2014, 46(6), pp. 1171-1203.

25.             A Q-Theory Model with Lumpy Investment, with Jianjun Miao, PDF, Economic Theory, 2014, 57(1), pp. 133-159.

26.             Credit Constraints and Self-fulfilling Business Cycles, with Zheng Liu, PDF, American Economic Journal: Macroeconomics, 2014, 6(1): 32-69.

27.             Financial Constraints, Endogenous Markups, and Self-fulfilling Equilibria, with Jess Benhabib, PDF, Journal of Monetary Economics, 2013 October, 60 (7), pp. 789-805.

28.             Land-Price Dynamics and Macroeconomic Fluctuation, with Zheng Liu and Tao Zha, PDF, Econometrica, May 2013, 81(3), pp. 1147-1184.

29.             Speculative Bubbles and Financial Crisis, with Yi Wen, PDF, American Economic Journal: Macroeconomics, July 2012, 4(3), pp.184-221.

30.             Bubbles and Total Factor Productivity, with Jianjun Miao, PDF, American Economic Review Papers and Proceedings, May 2012, 102(3), pp.82-87.

31.             Hayashi Meets Kiyotaki and Moore: A Theory of Capital Adjustment Costs, with Yi Wen,  PDF,  Review of Economic Dynamics, April 2012, 15(2), pp.207-255.

32.             Understanding Expectation-Driven Fluctuations-A Labor-Market Approach, PDF,  Journal of Money, Credit, and Banking, March 2012, 44(2-3), pp.487-506.

33.             Understanding the Effects of Technology Shocks, with Yi Wen, PDF, Review of Economic Dynamics, October 2011, 14(4),  pp.705-724.

34.             Volatility, Growth, and Welfare, with Yi Wen, PDF, Journal of Economic Dynamics and Control, October 2011, 35(10),  pp.1696-1709.

35.             Imperfect Competition and Indeterminacy of Aggregate Output , with Yi Wen, PDF, Journal of Economic Theory, November 2008, 143(1), pp. 519-40.

36.             Inflation Dynamics: A Cross-Country Investigation, with Yi Wen, PDF, Journal of Monetary Economics, October 2007, 54, pp. 2004-31.

37.             Another Look at Sticky Prices and Output Persistence, with Yi Wen, PDF, Journal of Economic Dynamics and Control, December 2006, 30(12), pp. 2533-52.

38.             Endogenous Money or Sticky Prices? Comment on Monetary Non-Neutrality and Inflation Dynamics, with Yi Wen, PDF, Journal of Economic Dynamics and Control, August 2005, 29(8), pp. 1361-83.

Working Papers

·        A Theory of Housing Demand Shocks, with Zheng Liu, and Tao Zha, PDF, March 2019.


Abstract: Aggregate housing demand shocks are an important source of house price fluctuations in the standard macroeconomic models, and through the collateral channel, they drive macroeconomic fluctuations. These reduced-form shocks, however, fail to generate a highly volatile price-to-rent ratio that co-moves with the house price observed in the data (the “price-rent puzzle”). We build a tractable heterogeneous-agent model that provides a microeconomic foundation for housing demand shocks. The model predicts that a credit supply shock can generate large co-movements between the house price and the price-to-rent ratio. We provide empirical evidence from cross-country and cross-MSA data to support this theoretical prediction.


·        A Search-Based Neoclassical Model of Capital Reallocation, with Feng Dong, and Yi Wen, PDF, August 2018.


Abstract: As a form of investment, the importance of capital reallocation between firms has been increasing over time, with the purchase of used capital accounting for 25% to 40% of firms’ total investment nowadays. Cross-firm reallocation of used capital also exhibits intriguing business-cycle properties, such as (i) the illiquidity of used capital is countercyclical (or the quantity of used capital reallocation across firms is procyclical), (ii) the prices of used capital are procyclical and more so than those of new capital goods, and (iii) the dispersion of firms’ TFP or MPK (or the benefit of capital reallocation) is countercyclical. We build a search-based neoclassical model to qualitatively and quantitatively explain these stylized facts. We show that search frictions in the capital market are essential for our empirical success but not sufficient financial frictions and endogenous movements in the distribution of firm-level TFP (or MPK) and interactions between used-capital investment and new investment are also required to simultaneously explain these stylized facts, especially that prices of used capital are more volatile than that of new investment and the dispersion of firm TFP is countercyclical.


·        Interest Rate Liberalization and Capital Allocation, with Zheng Liu, and Zhiwei Xu, PDF, December 2017.


Abstract: We study the consequences of interest-rate liberalization in a two-sector general equilibrium model of China. The model captures a key feature of China’s distorted financial system: state-owned enterprises (SOEs) have greater incentive to expand production and easier access to credit than private firms. In this second-best environment, liberalizing interest rate controls improves capital allocations within each sector, but exacerbates misallocations across sectors. Under calibrated parameters, interest-rate liberalization may reduce aggregate productivity and welfare, unless other policy reforms are also implemented to alleviate SOEs’ distorted incentives or improve private firms’ credit access.


·        Asset Bubbles and Monetary Policy, with Feng Dong and Jianjun Miao, PDF, January 2017.


Abstract: We provide an infinite-horizon model of rational asset bubbles in a Dynamic New Keynesian framework. Entrepreneurs are heterogeneous in investment efficiency and face credit constraints. They can trade land as an asset, which also serves collateral to borrow from banks with reserve requirements. Land commands a liquidity premium and a land bubble can emerge. Monetary policy can affect the condition for the existence of a bubble, its steady-state size, and its dynamics including the initial size. The `leaning against the wind' interest rate policy will reduce the bubble volatility, but it may come at the cost of raising the inflation volatility. Whether monetary policy should respond to asset bubbles depends on the particular interest rate rule adopted by the central bank and on the exogenous shocks hitting the economy.

·        Asset Bubbles and Foreign Interest Rate Shocks, with Jianjun Miao and Jing Zhou, PDF, December 2016.  

Abstract: We provide an infinite-horizon general equilibrium model of a small open economy with both domestic and international financial market frictions. Firms face credit constraints and use a bubble asset (land) as collateral to borrow. A land bubble can provide liquidity and relax credit constraints. Low foreign interest rates are conducive to bubble formation. A rise in foreign interest rate can cause the collapse of the asset bubble and a sudden stop. Asset bubbles provide an important amplification mechanism.

·        Liquidity Premia, Price-Rent Dynamics and Business Cycles, with Jianjun Miao and Tao Zha  PDF,  March 2014.

Abstract: This paper provides a theory of credit-driven housing bubbles in an infinite-horizon production economy. Entrepreneurs face idiosyncratic investment tax distortions and credit constraints. Housing is an illiquid asset and also serves as collateral for borrowing. A housing bubble can form because houses command a liquidity premium. The housing bubble can provide liquidity and relax credit constraints, but can also generate inefficient overinvestment. Its net effect is to reduce welfare. Property taxes, Tobin's taxes, macroprudential policy, and credit policy can prevent the formation of a housing bubble.

·        Uncertainty and Sentiment-Driven Equilibria, with Jess Benhabib and Yi Wen, PDF, March 2013

Abstract: We formalize the Keynesian insight that aggregate demand driven by sentiments can generate output fluctuations under rational expectations. When production decisions must be made under imperfect information about aggregate demand, optimal decisions based on sentiments can generate stochastic self-fulfilling rational expectations equilibria in standard economies without aggregate shocks, externalities, persistent informational frictions, or even any strategic complementarity. Our general-equilibrium model is deliberately simple, but could serve as a benchmark for more complicated equilibrium models with additional features.

·        Credit Risk and Business Cycles, with Jianjun Miao, PDF, September, 2010. 

Abstract: We incorporate long-term defaultable corporate bonds and credit risk in a dynamic stochastic general equilibrium business cycle model. Credit risk amplifies aggregate technology shocks. The debt-capital ratio is a new state variable and its endogenous movements provide a propagation mechanism. The model can match the persistence and volatility of output growth as well as the mean equity premium and the mean risk-free rate as in the data. The model implied credit spreads are countercyclical and forecast future economic activities because they affect firm investment through Tobin's Q. They also forecast future stock returns through changes in the market price of risk. Finally, we show that financial shocks to the credit markets are transmitted to the real economy through Tobin's Q.

·        Inventory Accelerator in General Equilibrium, with Yi Wen,  PDF, March 2009.

Abstract: We develop a general-equilibrium model of inventories with explicit microfoundations by embedding the production-cost smoothing motive (e.g., Eichenbaum, 1989) into a DSGE model with imperfect competition. We show that monopolistic firms facing idiosyncratic cost shocks have incentives to bunch production and smooth sales by carrying inventories. The model is broadly consistent with key stylized facts of aggregate inventory fluctuations, such as the procyclical inventory investment and the countercyclical inventory-to-sales ratio. In addition, the model yields novel predictions for the role of inventories in macroeconomic stability: Inventories may greatly amplify and propagate the business cycle, provided that markups or the variance of idiosyncratic cost shocks are sufficiently large. That is, a strong incentive to accumulate inventories under the cost-smoothing motive at the firm level may give rise to hump-shaped aggregate output dynamics and significantly higher volatility of GDP. Such predictions are in contrast to the implications of the recent general-equilibrium inventory literature, which shows that inventory investment induced by more conventional mechanisms (e.g., the stockout-avoidance motive and the (S,s) rule) does not increase the variance of aggregate output.

·        Solving Linear Difference Systems with Lagged Expectation by a Method of Undetermined Coefficients, with Yi Wen,  PDF, January 2006, Revised May 2006. Matlab Codes.

Abstract: This paper proposes a solution method to solve linear difference models with N lagged expectations. Variables with lagged expectations expand the model's state space greatly when N is large; and getting the system into a canonical form solvable by the traditional methods involves substantial manual work, which is prone to human errors. Our method avoids the need of expanding the state space of the system and shifts the burden of analysis from the individual economist/model solver toward the computer. Hence it can be a very useful tool in practice, especially in testing and estimating economics models with a high order of lagged expectations. Examples are provided to demonstrate the usefulness of the method. We also discuss the implications of lagged expectations on the equilibrium properties of indeterminate DSGE models, such as the serial correlation properties of sunspots shocks in these models.