Research Interests
Macroeconomics, Labor Economics, Computational Macroeconomics
Research Papers
This paper studies the driving forces behind the dynamics of the skill premium and college enrollment rate in the postwar US economy. I develop an overlapping generations general equilibrium model with endogenous discrete schooling choice. The production technology features capital-skill complementarity as in Krusell et al. (2000). Within this framework, I quantitatively examine the effects on the skill premium and enrollment rate of two exogenous forces, investment-specific technological change (ISTC) and the demographic change known as “the baby boom and baby bust”. I find that demographic change plays an important role in accounting for the dynamics of the skill premium before the late 1970s, while ISTC drives most of the changes in the skill premium since then. ISTC also explains about 30% of the increases in the enrollment rate for the period 1951-2000, while demographic change does not have a significant effect on the enrollment rate.
2. “Investment
Specific Technological Change, Skill Accumulation, and Wage Inequality,”
(with Zheng Liu, Review of Economic Dynamics
vol.
11 (2008), pp. 314-334.
Wage inequality between education groups in the U.S. has increased substantially since the early 1980s. The relative number of college-educated workers has also increased dramatically in the postwar period. Many studies attribute the dynamics of wage inequality to skill-biased technological change, while treating the relative number of skilled workers as exogenous. In this paper, we develop and calibrate a standard growth model, in which the dynamics of both skill accumulation and wage inequality arise as an equilibrium outcome driven by measured investment-specific technological change. Within this framework, we also examine quantitatively the effects of three hypothetical tax-policy reforms. We find that a revenue-neutral elimination of capital income taxes leads to a modest increase in wage inequality and a sizable welfare gain. An increase in the progressiveness of labor income taxes is not effective in reducing income inequality and leads to large declines in average productivity and welfare. In contrast, a policy that provides direct subsidies for human capital accumulation tends to encourage skill formation, alleviate the wage inequality, and improve welfare.
3. “College Gender Gap and Gender Differences in Skill Premium,” (July 2005)
This paper documents a dramatic reverse pattern of gender-specific college educational attainment over the past four decades and asks a quantitative question: to what extent can such changes be accounted for by changes in the gender-specific college wage premium? I develop and calibrate an overlapping generations model with discrete schooling choice. I also test two expectations hypotheses-- perfect foresight (rational expectations) vs. naive expectations. The calibration results show that, for men the naive expectations prediction fits the data better, while for women, the rational expectations prediction captures adequately well the trend of enrollment rate up to 1979. For both genders, the naive expectations prediction captures (even overshoots) the dramatic increase of the college enrollment rates since 1980.
4. “Currency Substitution in Obstfeld-Rogoff Model” (November 2002)
This paper applies the Obstfeld-Rogoff benchmark model (Obstfeld & Rogoff (1995)) to a currency substitution environment. I find that the introduction of domestic agents’ foreign currency holding does not change the model significantly except for money market equilibrium conditions. I also identify the “border effect” of the money shock: when the shock on domestic money supply propagates abroad, its effect declines. In addition, “dollarization” benefits both countries, but the magnitude depends on the population size of the two countries and the parameter values of elasticity of substitution.
Work in Progress
1. “What happens to Mexican Skill Premium after NAFTA?” (with Zheng Liu, work in progress)
The skill premium in Mexico steadily increased from 1987 to 1994, and slightly decreased thereafter. This fact suggests that NAFTA may have played an important role. In this paper, we evaluate the importance of three factors associated with the increase in trade openness on the Mexican skill premium in a two-country general equilibrium model. These factors are specialization of production, foreign direct investment, and technology adoption. By quantitatively examining the role of each of these three factors, we contribute to recent debates in the literature about the role of technological change vs. international trade in accounting for the changes in skill premium.
2. “A Two-Sector Model of Information Technology and ‘New Economy’,” (work in progress)
This paper tries to link three stylized facts, the declining relative price of Information Technology (IT) goods, the increasing share of IT capital in the GDP, and the increasing skill premium after 1980, into a unified framework. I develop a two-sector growth model. One sector uses physical (non-IT) capital, IT capital and labor to produce non-IT goods, while the other uses physical capital, human capital and labor to produce IT goods. The previous three stylized facts arise as the equilibrium results of the model when we have the endogenous growth in human capital.
3. “Stock Market Participation over the Life Cycle,” (with Lei Guo and Zheng Liu, work in progress)
We document that the stock market participation rate is hump-shaped over the life cycle and increasing with the wealth level. We build and calibrate a large-scale overlapping generations model that features fixed cost of stock market participation, borrowing constraints, and idiosyncratic income risks. Our preliminary results show that, under reasonable parameter values, the model does well in accounting for the observed participation patterns. We would also like to investigate the quantitative importance of each feature in the model, as well as the model’s implications for equity premium.