Macroprudential Policy and Asset Liquidity (Job Market Paper)
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.
Working in Progress
Flip or Flop? Real Estate Transaction Taxes as Macro-prudential Policy
This paper analyzes the effects of property transaction taxes on real estate prices and taxpayers’ investment decisions using a tax reform in Taiwan which required sellers of non-owner-occupied real estate to pay large percentages of the full selling price for properties resold within one year (15%) or resold after one year but within two years (10%) from the original purchase date. We link the universe of personal tax returns to transaction records to show bunching at the 12-month and 24-month holding period thresholds under this tax, but no such bunching prior to implementation, suggesting that owners were highly attentive to the tax. We apply a sharp RD to examine the effect on prices, exploiting the fact that the tax applied retroactively to properties purchased prior to the implementation date. While average transaction prices do fall immediately after implementation, this is due to a decline in the number of high-end property sales that would have been subject to the tax. Our initial results suggest limited effects of the transaction tax towards curbing the rapid rise in real estate prices in recent years.
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.