Currency Pegs, Trade Imbalances and Unemployment: A Reevaluation of the China Shock (joint with Marc de la Barrera and Masao Fukui)
We develop a dynamic quantitative model of trade and labor adjustment, incorporating nominal wage rigidity and consumption–saving decisions, to study how China’s currency peg interacted with its rapid growth in shaping the US economy. We show that the peg temporarily boosts China’s export growth by preventing an appreciation of the Chinese currency, thereby amplifying the US labor-market consequences of the China shock. At the same time, the temporary export boom increases China’s savings and leads to a larger US trade deficit. Calibrating the model to match trade and labor-market flow data, we find that China’s currency peg played a quantitatively important role in the US manufacturing decline, the widening US trade deficit, and unemployment dynamics. These results underscore the importance of exchange-rate adjustment (or the lack thereof) for understanding trade shocks. We also find that the overall welfare impact of the China shock remains significant and positive.
Sectoral Labor Reallocation, Inflation and Monetary Policy (joint with Marc de la Barrera and Masao Fukui) -- draft coming soon!
We study how frictional labor reallocation shapes the inflation dynamics and monetary policy using a multi-sector New Keynesian economy. We derive analytical expressions for the Phillips curve and welfare, demonstrating that the frictional labor mobility influences sectoral inflation dynamics through two sufficient statistics: a mobility elasticity and the steady-state labor transition matrix. Using a spectral decomposition, we show that the persistence of sectoral shocks is determined by the interaction between frictions in labor mobility and nominal rigidity. When labor reallocation across sticky sectors is costly, the effect of sectoral shocks become more persistent. In response to sectoral shocks, monetary policy balances stabilization of standard aggregate output gaps with persistent labor and price misallocation. When these sticky sectors face a negative productivity shock, optimal monetary policy has an extra incentive to tighten to decrease the relative demand and thereby incentivize labor outflows.
The Intensive and Extensive Margins of the Decline in US Manufacturing (joint with Jaeeun Seo) -- draft coming soon!
We show that the decline of U.S. manufacturing is driven by the extensive margin: young workers disproportionately avoid entry into declining sectors, while incumbents exit through retirement. We document that the labor supply elasticity with respect to wages are 7 times higher for new entrants than for incumbents. We develop a model that shows this high-elasticity entrant margin creates quantity amplification and wage attenuation in the labor market in response to sectoral shocks, and a smaller underlying demand shock is sufficient to explain the observed decline compared to models lacking this margin. A multi-region quantitative application of our framework replicates key empirical facts, including local-level recoveries driven by young workers entering service sectors. Our results suggest adjustment policies may be more effective when targeting the high-elasticity extensive margin of new entrants rather than the low-elasticity intensive margin of incumbents.
Model (non-)disclosure in supervisory stress tests (joint with Marc de la Barrera and Ying Gao)
We study the Federal Reserve's problem of disclosing the models it uses in supervisory stress tests of large banks. Banks argue that nondisclosure leads to inefficiencies stemming from uncertainty, but regulators are concerned that full disclosure can lead to banks gaming the system. We formalize the intuition behind this trade-off in a stylized model where both the regulator and banks have imperfect, private models about a risky asset, and the regulator uses its own model to `stress test' the investment. We show that if the regulator uses its model to test the banks' investment, full disclosure is suboptimal, and the regulator may benefit from hiding the model when the bank's model is more precise than the regulator's own model. The key idea is that hiding the regulator's model forces the bank to guess it using the bank's own models, effectively eliciting the bank's private information. We also show that if the regulator can fine-tune disclosure policies, the regulator can approximately enforce the first-best action of banks, as if the regulator fully knew all the private information held by banks. The intuition is closely related to the Cremer and McLean (1988) information rent extraction result.
Quality-Variety Tradeoff and Endogenous Specialization of Cities
The cross number of minimal zero-sum sequences in finite abelian groups, Journal of Number Theory, 157: 99-122 (2015). arXiv
William Witheridge (2024), Monetary Policy and Fiscal-led Inflation in Emerging Markets
Discussion at Wake Forest Empirical Macro Conference 2024