UCLA

I am an economist working in the areas of International Finance and Macroeconomics. I study the determinants of exchange rates and sovereign risks and how they shape the cross-border movements of financial assets. Understanding these issues is crucial for designing effective monetary and fiscal policies in an open economy. As I show below in the three chapters of my dissertation, much of my work connects macroeconomic theory with rich micro-level data to empirically verify theoretical mechanisms.

In my first chapter of the dissertation (joint with Paula Beltran, IMF), “Inelastic Financial Markets and Foreign Exchange Interventions,” we leverage the rebalancings of a local-currency government bond index for emerging countries as a quasi-natural experiment to identify the required size of foreign exchange intervention to stabilize exchange rates. We show that the rebalancings create large and exogenous currency demand shocks that move exchange rates. Our resultsprovide empirical support for models of inelastic financial markets where foreign exchange intervention serves as an additional policy tool to effectively stabilize exchange rates. Under inelastic financial markets, a managed exchange rate does not have to compromise monetary policy independence even in the presence of free capital mobility, relaxing the classical trilemma constraint. Our results show that, compared with countries with a managed exchange rate regime, countries with a free-floating exchange rate regime are more than twice more effective at stabilizing exchange rates. This is because these countries’ volatile exchange rates lead to more inelastic financial markets and generate further departure from the trilemma.

In the second chapter of my dissertation (joint with Xitong Hui, CUHK), “A Theory of International Asset Returns: Country Size and Equity Rebalancing," we provide a theoretical framework to understand the return differences of sovereign bonds issued in different currencies. We develop a continuous-time two-country Lucas tree model with equity constraint and propose that the country-size effect and the equity-rebalancing effect are the key determinants of sovereign bond returns. The country-size effect spills over home production risk to a smaller country through trade and equity rebalancing; equity constraint limits equity rebalancing and creates endogenous uncovered interest parity deviations in both normal and crisis times. In the period of crisis, the larger country’s sovereign bond becomes a global safe asset when the country-size effect dominates the equity rebalancing effect, as is the case with the United States.

In the final chapter of my dissertation (joint with Tamon Asonuma, IMF), “Toolittle Sovereign Debt Restructurings," we study why sovereign debt restructurings often do not receive sufficient debt relief (“too-little" problem), followed by repeated restructurings. We classify 197 episodes of private external debt restructuring in 1975-2020 and provide novel empirical evidence that (1) restructurings with preemptive strategies are more likely to be “non-cured,” requiring a second restructuring within five years; (2) restructuring strategies and outcomes tend to follow the previous restructuring; (3) “cured” post-default restructurings have better GDP growth and debt dynamics over the long horizon than non-cured preemptive restructurings. We propose a simple two-period model with endogenous choices of restructuring strategies to rationalize these stylized facts. The model predicts that the foreign creditor’s state-dependent consumption smoothingmotive results in small haircuts at preemptive restructurings, leading to new bond issues with high borrowing costs and thus subsequent restructurings.

Apart from the focus on exchange rates and sovereign risks, a common theme across all my work is a passion to work on rich micro-data and finding plausible natural experiments for valid identification. I then use theoretical models in macroeconomics, either new or existing, to rationalize novel empirical findings and address policy-relevant questions. I hope to continue this “micro-to-macro approach" in my future research agenda and continue to pursue my interests in international finance and macroeconomics, with a special focus on issues in exchange rates and sovereign risks.