Zhesheng Qiu

Zhesheng Qiu
Job Market Paper

Level-k DSGE and Monetary Policy

This paper develops a new framework of level-k DSGE for monetary policy analysis. Incomplete markets are introduced to guarantee the eductive stability of the equilibrium. k=1.265 is identified using growth and inflation expectations from the Michigan Survey of Consumers, capturing the missing indirect channels and weakened direct channels in households' forecast rules, as well as the wedge between expectations and reality. With more empirical support, the model is applied in four different issues related to monetary policy. First, the real effects of monetary shocks are accumulative when reasoning levels are low and households' planning horizons are short. Second, inflation targeting confuses households with the dynamics of GDP, and hence weakens demand stabilization. Third, in liquidity traps, recovery can be fast, slow or even impossible, depending on how deep the recession is. Forth, the initial effect of monetary shocks in far future is dampened by level-k, but the cumulative effects across time can be large. When k goes to infinity, the level-k DSGE reduces to a basic New Keynesian model as in Gali (2015).

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Other Research

Search-Based Sticky Prices (with José Víctor Ríos Rull)

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.

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Rehypothecation and Intermediary Leverage

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.

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Housing and Saving with Finance Imperfection (with Yanbin Chen and Fangxing Li)

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.

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Teaching Experience

Teacher Assistant:

Statistics for Economists - Spring 2014

Economics for Business - Fall 2013

Introductory Macroeconomics - Fall 2012, Spring 2013


Macroeconomics, Bounded Rationality, Money and Banking


University of Pennsylvania
McNeil Building - Room 477
3718 Locust Walk
Philadelphia, PA 19104





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José-Víctor Ríos-Rull


Jośe-Víctor Ríos-Rull (advisor)

Department of Economics

University of Pennsylvania

507 McNeil Building, 3718 Locust Walk

Philadelphia, PA, 19104, USA



Dirk Krueger

Department of Economics

University of Pennsylvania

511 McNeil Building, 3718 Locust Walk

Philadelphia, PA, 19104, USA



Harold Cole

Department of Economics

University of Pennsylvania

436 McNeil Building, 3718 Locust Walk

Philadelphia, PA, 19104, USA


Job Market Candidate Status
I am on the job market and will be available for interviews during the AEA meeting in Philadelphia on January 5-7, 2018.