This paper develops a dynamic model to study optimal liquidity regulations for multiple assets with differing levels of liquidity. I show that optimal macroprudential policies are affected by both asset liquidity and the multi-asset structure. Lower asset liquidity amplifies drops in asset prices and tightens the collateral constraint during financial crises, thus raising macroprudential taxes to discourage holding. With multiple assets, the marginal benefit of investing in one asset is affected by the future cross-price elasticities of all assets. The effects of cross-price elasticities depend on future trading positions and the tightness of the collateral constraint. Quantitatively, optimal macroprudential policies favor a portfolio with more liquid assets and less borrowing. In the constrained-efficient equilibrium, agents decrease leverage by 9.4% and increase the liquid share of the balance sheet by 2.6% compared with the unregulated equilibrium. The optimal policy lowers the probability of encountering financial crises by 8% and increases consumption by 0.99%. Finally, I provide theoretical and quantitative analyses on the efficacy of the Basel III reform. The Basel III reform increases agents’ liquid holdings and decreases the probability of crises. However, it deteriorates welfare, as agents overaccumulate liquid assets.
This paper focuses on the welfare analysis of currency depreciation through endogenous R&D where the economy faces a trade-off between the gain from export and disinvestment of technology. By using country-level data, regressions and panel VAR indicate that undervaluation of the exchange rate and real depreciation are negatively correlated with the R&D activity. The stylized fact can be explained by a model that features endogenous productivity in a small open economy where real depreciation raises the cost of R&D investment. Under real depreciation shock, the economy faces a short-term boom in consumption and output but a long-term bust due to sluggish productivity. Welfare increases slightly following a real depreciation shock when productivity is exogenous. However, when productivity is endogenous, welfare decreases by 0.1% under 1% real depreciation.
This paper derives the optimal monetary policy in a small open economy with endogenous productivity. The optimal policy is a targeting rule of inflation, output gap, and the terms of trade, which generates a trade-off between the international purchasing power and the cost of importing R&D. Under a positive technology shock, an expansionary monetary policy, which leads to depreciation, speeds up the convergence of the technology process via a decline in R&D investment. To take advantage of this mechanism, central banks have an incentive to adjust the interest rate more aggressively. Quantitatively, the variation of the optimal monetary policy is three times larger than the domestic deflation-based Taylor rule and two times larger than the optimal monetary policy under an exogenous productivity process. The optimal monetary policy can improve welfare by 0.52% compared with the standard Taylor rule.
Works in Progress
This paper analyzes the effects of transfer taxes targeting property flips on house prices and investment decisions. We study a 2011 reform in Taiwan which required sellers of non-owner occupied properties to pay a surcharge of up to 15% of the full sale price for properties held for two years or less. Linking the universe of personal income tax returns to transaction records, we show immediate and substantial bunching at the two-year holding period threshold, but negligible changes in overall prices. According to our missing mass estimates, the tax generated a 75% drop in one-year flips and a 40% drop in overall second home sales volume. We use shocks to housing net worth from inheritances received after decedents’ untimely deaths to show that investors with more portfolio exposure pass through the tax to buyers. While low-wealth out-of-town investors account for most of the drop in sales volume, locals and non-residents earn statistically identical holding period returns in the pre-reform period. We use spatial and time variation in the severity of typhoon seasons to estimate a 20% share of noise trading prior to the reform. We combine our estimates of the noise trading share and change in short-term sales volume to parametrize a model of optimal financial transaction taxes. The optimal transfer tax on short-term sales is 4%, at most, which is close to the flat transfer tax rates imposed in most major real estate markets. Our results point to market segmentation and inventory effects as key constraints on the effectiveness of property flip taxes towards promoting housing affordability.
Life-Cycle Patterns of Portfolio Diversification
This paper investigates life-cycle features of household portfolio diversification. Using data of taxation on capital gains from Taiwan, we observe the universe of personal stock holdings from 2003 to 2014. We documented that the level of portfolio diversification, measured as one minus the Herfindahl–Hirschman Index, exhibits a hump-shape pattern. While people across all age groups significantly under-diversify their stock holdings, the level of diversification peaks in their 50s and drops afterward. We also found that mid-age and elder-age groups reduce diversification before the crisis, whereas only the mid-age group rebalances their portfolio after the crisis. These observations are against the standard portfolio theory and suggest that there may exist other determinants of portfolio decisions, such as solvency constraints or limited attention. Our conjectures still require further analyses.