Zhesheng Qiu

We pose a directed search style shopping friction on top of an otherwise standard New Keynesian structure, and nest it as a special case. Firms are not free to increase prices not only because it reduces the quantity demand, but also because it induces more competition on the supply side, and hence reduce the likelihood that a produced good can be sold. When the good market is tighter in aggregate, there is less room for a firm to reduce its own market tightness by posting a lower price, so that all firms have higher desired price markup. As a result, our model can produce procyclical price markup and labor productivity conditional on monetary shocks, which is consistent with our empirical findings in SVAR. In our model, inflation is partly pulled by demand, in contrast to the standard model in which it is completely pushed by cost. Our model performs equally well in other aspects, compared with a medium scale New Keynesian DSGE model, and provide new insights on how demand creates its own supply.

This paper provides a theory of endogenous leverage through rehypothecation in collateralized intermediation. Overcollateralization with a rehypothecation option arises as an optimal contract between broker dealers and their clients due to clients' private information on collateral quality. Knowing less about the quality of the collateral, broker dealers are able to repledge the collateral with lower margins to obtain cheap cash flows from intermediating the collateral. The cheap cash flow increases broker dealers' risk-shifting incentive, and induces potential risks of losing the collateral, to the clients with high collateral quality. A compensation for these risks arises to make the high quality clients break even, but becomes an information rent for the lower quality ones. Hence, clients' private information on collateral quality enables the broker dealers with positive net worth to obtain higher leverage through cheap cash flow, but also makes the cheap cash flow more expensive. As a result, the private information on collateral quality first raises broker dealers' leverage, and then reduces it. In the over-the-counter market, this induces too much leverage, and too little leverage, respectively. The results shed light on why rehypothecation flourishes before the 2008 financial crisis, and then collapses in U.S.

Annals of Economics and Finance 14, no. 1 (2013): 207-248.

Emprical facts show that controlling for net wealth, more housing wealth leads to higher marginal propensity to consume. This indicates that housing wealth is illiquid. In theory, it is the refinancing and repayment constraint, instead of the downpayment constraint, that makes housing wealth illiquid. In quantitative work, the emergence of housing market does not reduce Chinese households' non-housing saving rates, and increases the aggregate households' saving rates dramatically.