Working Papers
''Carbon emissions over business cycles: The role of financial markets'' with Ying Tung Chan (Job Market Paper)
Recessions associated with financial crises have become common in the US since 1990. This paper examines the importance of the financial frictions for US carbon emissions dynamics. Our empirical analysis reveals that financial market conditions have a substantial and nonlinear impact on carbon emissions dynamics. We build and estimate an environmental dynamic stochastic general equilibrium model that features financial frictions and a risk shock (a type of credit shock). The results show that: (i) the presence of financial frictions doubles the volatility of carbon emissions under positive TFP and government expenditure shocks; (ii) the risk shock generates counterfactual paths that can largely replicate the movements in emissions growth; (iii) the contribution share of the risk shock to emissions growth dynamics reaches a peak of around 50% after each recession; (iv) the optimal carbon tax rate response to shocks heavily depends on the Taylor rule specification.
Recessions associated with financial crises have become common in the US since 1990. This paper examines the importance of the financial frictions for US carbon emissions dynamics. Our empirical analysis reveals that financial market conditions have a substantial and nonlinear impact on carbon emissions dynamics. We build and estimate an environmental dynamic stochastic general equilibrium model that features financial frictions and a risk shock (a type of credit shock). The results show that: (i) the presence of financial frictions doubles the volatility of carbon emissions under positive TFP and government expenditure shocks; (ii) the risk shock generates counterfactual paths that can largely replicate the movements in emissions growth; (iii) the contribution share of the risk shock to emissions growth dynamics reaches a peak of around 50% after each recession; (iv) the optimal carbon tax rate response to shocks heavily depends on the Taylor rule specification.
''International currency, trend inflation, and indeterminacy'' (R&R)
The impact of trend inflation on the share of the leading international currency in global payments is investigated in a three-country DSGE model. The results show that the position of the leading international currency persists even if trend inflation in its own country increases from 0 to 8 percent. To increase trend inflation in the leading international currency country from 2 to 5 percent will not lead to a more volatile share of its currency compared with the zero-inflation baseline case. Incorporating trend inflation in an open economy has new dynamics: domestic trend inflation amplifies the spillover effects of a domestic technology shock on foreign countries; trend inflation in foreign countries reinforces these spillover effects through the effect of price dispersion.
The impact of trend inflation on the share of the leading international currency in global payments is investigated in a three-country DSGE model. The results show that the position of the leading international currency persists even if trend inflation in its own country increases from 0 to 8 percent. To increase trend inflation in the leading international currency country from 2 to 5 percent will not lead to a more volatile share of its currency compared with the zero-inflation baseline case. Incorporating trend inflation in an open economy has new dynamics: domestic trend inflation amplifies the spillover effects of a domestic technology shock on foreign countries; trend inflation in foreign countries reinforces these spillover effects through the effect of price dispersion.
Selected Working Papers
''Should the Yuan become an international currency? ''
This paper explores the costs and benefits to China of having an international currency. It constructs a two-country DSGE model in which the home country provides the international currency and the foreign country uses it to purchase imports. I derive the implications of this model under two pricing assumptions. One, where the prices of all traded goods are set in the domestic currency (PCP) and the other where the prices of all traded goods are set in the international currency (PCP-LCP). I calibrate the home country to the Chinese data. Results show that, in all cases, technology shocks and monetary policy shocks in the home country have greater effects on consumption and output abroad than equivalent shocks in the foreign country. Monetary policy in the home country is thus more potent. Costs of having an international currency are: (i) the seigniorage collected by the home country decreases in response to a positive technology shock in the home country; and (ii) the home country’s households experience losses because an asymmetric exchange rate pass-through leads to a sluggish adjustment of consumption in the home country. These costs are only incurred in the PCP-LCP case.
This paper explores the costs and benefits to China of having an international currency. It constructs a two-country DSGE model in which the home country provides the international currency and the foreign country uses it to purchase imports. I derive the implications of this model under two pricing assumptions. One, where the prices of all traded goods are set in the domestic currency (PCP) and the other where the prices of all traded goods are set in the international currency (PCP-LCP). I calibrate the home country to the Chinese data. Results show that, in all cases, technology shocks and monetary policy shocks in the home country have greater effects on consumption and output abroad than equivalent shocks in the foreign country. Monetary policy in the home country is thus more potent. Costs of having an international currency are: (i) the seigniorage collected by the home country decreases in response to a positive technology shock in the home country; and (ii) the home country’s households experience losses because an asymmetric exchange rate pass-through leads to a sluggish adjustment of consumption in the home country. These costs are only incurred in the PCP-LCP case.
''Optimal climate policy in a supply chain: energy taxes versus cap-and-trade or intensity targets,''
This paper investigates the role of the production supply chain in the choice of climate policies. The existing climate-economy models assume a single production stage which is found to heavily affect the results of the climate policy assessment. We construct a environmental dynamic stochastic general equilibrium (E-DSGE) model that features multiple stages of production with productivity shocks specified in each stage of production. We find that the cap-and-trade policy is recommended for the productivity improvements in all stages of production. The intensity target policy is applicable only when the productivity improvement is in the downstream stage. In contrast, the taxation policy has a minimal effect in dampening the responses of carbon emissions to productivity shocks in the presence of a supply chain.
This paper investigates the role of the production supply chain in the choice of climate policies. The existing climate-economy models assume a single production stage which is found to heavily affect the results of the climate policy assessment. We construct a environmental dynamic stochastic general equilibrium (E-DSGE) model that features multiple stages of production with productivity shocks specified in each stage of production. We find that the cap-and-trade policy is recommended for the productivity improvements in all stages of production. The intensity target policy is applicable only when the productivity improvement is in the downstream stage. In contrast, the taxation policy has a minimal effect in dampening the responses of carbon emissions to productivity shocks in the presence of a supply chain.
Publications
"The impact of climate change on the labor allocation:Empirical evidence from China," Journal of Environmental Economics and Management, Vol. 104 (Nov 2020), Article 102376, with Kaixing Huang, Jikun Huang, Jinxia Wang, and Christopher Findlay.
"Does FDI actually affect income inequality? Insights from 25 years of research," Journal of Economic Surveys, Vol. 34, No. 3 (Jun 2020), pp. 630-659, with Kaixing Huang and Nicholas Sim.
"Corporate social responsibility, corporate financial performance financial performance and the confounding effects of economic fluctuations: A meta-analysis," International Review of Financial Analysis, Vol. 70 (Jul 2020), Article 101504, with Kaixing Huang and Nicholas Sim.