I am an Associate Professor (with tenure) of Economics at the Tsinghua University.
The Neoclassical Growth of China featured in VoxEU
Jesus Fernandez-Villaverde, Lee Ohanian, and Wen Yao
This paper studies China's four-fold increase in per capita GDP relative to the U.S. between 1995 and 2019. First, we argue that China's growth pattern is very similar to that of several other East Asia economies that initially grew very quickly. Second, we show that a minimalist Ramsey-Cass-Koopmans model with a parsimonious TFP catch-up process can account for China's growth path and the growth paths of other East Asia economies at a similar stage of development. The growth paths of other East Asia economies and the model predictions suggest that China's growth will substantially slow, so much so that we find the U.S. growth rate will likely be higher than China's by 2043. We also find that China's income per capita will level off at roughly 44% of the U.S. level around 2100.
The Effects of Financial Integration during Crises
Aidi Tang and Wen Yao
Journal of International Money and Finance, Volume 124, 102613, 2022
We investigate the role of financial integration in the spread of the 2008 global financial crisis. Using a rich dataset covering 31 countries between 1978 and 2018, we find that during the 2008 financial crisis, when two countries have a higher level of financial integration, their consumption cycles are more synchronized. Similar patterns are found for investment and output. However, we also find that during times outside of the 2008 financial crisis, higher financial integration leads to more divergent consumption and output cycles. We build a two-country model with global banks and variable capital utilization to illustrate that the impact of financial integration on business cycle synchronization depends on the types of shock and that variable capital utilization is the key to accounting for the relationship between financial integration and investment synchronization. The calibrated model replicates our empirical findings reasonably well. Finally, our welfare analysis indicates that financial integration leads to welfare losses during financial crises but to welfare gains outside of financial crises.
Structural Change and Aggregate Employment Fluctuations in China featured in VoxChina
Wen Yao and Xiaodong Zhu
International Economic Review, Volume 62, No.1, 2021
In developed countries, aggregate employment is strongly pro-cyclical and almost as volatile as output. In China, the correlation of aggregate employment and output is close to zero, and the volatility of aggregate employment is very low. We argue that the key to understanding aggregate employment fluctuations in China is labour reallocation between the agricultural and non-agricultural sectors, and that the income effect plays an important role in determining the labour reallocation dynamics in both the long run and short run.
Earnings Inequality and China's Preferential Lending Policy
Chong-En Bai, Qing Liu, and Wen Yao
Journal of Development Economics, Volume 145, 102477, 2020
Wages have been distributed increasingly unequally over the past decades for most countries. While policymakers have tried different methods to stop the earnings inequality from widening, the effects have been minimal. In this paper, we propose a novel mechanism through which a preferential lending policy reduces the earnings inequality, inspired by the case of China. As most countries have, China has experienced increasing earnings inequality over the past decades; however, the inequality started to decline substantially after 2009. We argue that this change reflects the following important institutional change in China: since 2009, the local governments have been granted the ability to offer their preferred firms cheap credit. Since many of these preferred firms are unskilled-labor intensive, with a lower financing cost, they increase their investment and hire more unskilled workers, thereby reducing the earnings inequality. We incorporate this mechanism into a two-sector model and show quantitatively that our model can account for most of the decline of the earnings inequality observed in the data. Moreover, the model also predicts a surge in the aggregate investment rate, which is also in line with the data.
International Business Cycles and Financial Frictions
Wen Yao
Journal of International Economics, Volume 118, pp 283-291, 2019
In this study, I build a two-country DSGE model to investigate the impact of financial integration on business cycle co-movements with financial frictions. In this model, the investor can borrow but faces a collateral constraint that is tied to the value of her capital and real estate holdings. I show quantitatively that the degree of financial integration and real exchange rate adjustment are important for understanding business cycle synchronization under different types of shocks. With the technology shock, greater financial integration leads to lower cross-country correlations, while with the financial shock, greater financial integration leads to stronger cross-country correlations. These findings are consistent with the empirical evidence from the literature.
Computing DSGE Models with Recursive Preferences and Stochastic Volatility
Dario Caldara, Jesus Fernandez-Villaverde, Juan F. Rubio-Ramirez, and Wen Yao
Review of Economic Dynamics, Volume 15, Issue 2, 2012
This paper compares different solution methods for computing the equilibrium of dynamic stochastic general equilibrium (DSGE) models with recursive preferences such as those in Epstein and Zin (1989, 1991) and stochastic volatility. Models with these two features have recently become popular, but we know little about the best ways to implement them numerically. To fill this gap, we solve the stochastic neoclassical growth model with recursive preferences and stochastic volatility using four different approaches: second and third-order perturbation, Chebyshev polynomials, and value function iteration. We document the performance of the methods in terms of computing time, implementation complexity, and accuracy. Our main finding is that perturbations are competitive in terms of accuracy with Chebyshev polynomials and value function iteration while being several orders of magnitude faster to run. Therefore, we conclude that perturbation methods are an attractive approach for computing this class of problems.