"Crowding Out or Crowding In? UI and Private Insurance." This paper reconsiders the results in Young (2004) under the assumption that debt limits are endogenously determined in order to prevent default, as in Kehoe and Levine (1993). I find that eliminating UI is a net welfare loss for the economy because it eliminates all borrowing, although for smaller changes in the replacement rate the effect of changing debt limits is minor. General equilibrium effects dominate. Preliminary and relatively dormant.
"Sticky Information Diffusion and Inertial Behavior of Durables Consumption" with Yulei Luo. This paper examines the implications of two types of sticky information diffusion: finite information-processing capacity (called rational inattention or RI) and sticky expectations (henceforth SE) for the joint dynamics of non-durables and durables consumption at both individual and aggregate levels. Specifically, we show that both RI and SE can improve the model's predictions at the aggregate level: (1) They reduce the relative volatility of non- durables to durables consumption and (2) they increase the first-order serial correlation of expenditures on durables. In particular, we show that both hypotheses may provide a potential explanation for Mankiw (1982)'s puzzle. Furthermore, we show that SE can better characterize the inertial behavior at the individual level (infrequent and lumpy purchases on durables). Finally, we show that allowing for heterogeneity in channel capacity can endogenize SE and thus makes the model with heterogenous capacity better explain the data at both individual and aggregate levels.
"Robustness, Information-Processing Constraints, and the Current Account in Small Open Economies" with Yulei Luo and Jun Nie. We examine the effects on the current account of two types of information imperfections: robustness (RB henceforth) and finite information-processing capacity (called rational inattention or RI henceforth) in an otherwise standard intertemporal current account (ICA) model. Specifically, we show that the interaction of RB and RI can improve the model's predictions on the joint dynamics of consumption, the current account, and income in small open emerging and developed economies. Furthermore, the model with the two information frictions can generate the observed positive relationship between income uncertainty and the current account surplus.
"Optimal Stabilization Policy in a Model with Endogenous Sudden Stops" with Gianluca Benigno, Huigang Chen, Christopher Otrok, and Alessandro Rebucci. We develop a framework to study optimal stabilization policy in an economy with an occasionally binding credit constraint. The objective of the paper is to provide a framework to understand both the optimal response to a ‘sudden stop,’ as well as the behavior of optimal policy outside of the crisis period. In the model, the policy instrument of the government is a distortionary tax wedge on consumption of non-tradable goods. We find that, for a plausible calibration of the model, the optimal policy is highly nonlinear. If the constraint is not binding, the optimal tax rate is zero, as in an economy without a credit constraint. If the constraint is binding, the optimal tax rate is negative, meaning that the government subsidizes nontradable consumption. Preliminary and still incomplete.
"Portfolio Choice with Information-Processing Limits" with Alta Batchuluun and Yulei Luo. This paper studies the portfolio choice of an agent with limited information processing ability. Very preliminary.