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Department of Economics
Hong Kong University of Science
and Technology
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Pengfei Wang
Professor
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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. Publications 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. |