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Department of Economics

Hong Kong University of Science and Technology


Pengfei Wang


My research fields are: macroeconomics, monetary economics and financial economics. My main research areas are:

·          Interaction between market frictions (borrowing constraints, uninsurable idiosyncratic risk, adjustment costs, and taxation)  and heterogeneity (heterogamous households/firms ) in general equilibrium

·          Self-fulfilling prophecy due to endogenous markup, imperfect information or financial frictions

·          Asset pricing in production economies

·          Nominal rigidities

·          Inventory dynamics

For a summary of my current research, please see my Research Statement.

Google Scholar Profile


1.    Endogenous Information Acquisition and Countercyclical Uncertainty, with Jess Benhabib and Xuewen Liu,  PDF, Forthcoming: Journal of Economic Theory.

2.    Chaotic Banking Crises and Banking Regulations, with Jess Benhabib and Jianjun Miao, PDF, Forthcoming: Economic Theory.

3.    Housing Bubbles and Policy Analysis, with Jianjun Miao and Jing Zhou  PDF,  Journal of Monetary Economics, 2015, 76, pp.57-70.

4.    Credit Search and Credit Cycles, with Feng Dong and Yi Wen, PDF, Forthcoming: Economic Theory.

5.    Stock Market Bubbles and Unemployment, with Jianjun Miao and Lifang Xu,  PDF, March 2012, Forthcoming: Economic Theory.

6.    Sentiments, Financial Markets, and Macroeconomic Fluctuations, with Jess Benhabib and Xuewen Liu  PDF,  Forthcoming: Journal of Financial Economics.

7.    A Bayesian DSGE Model of Stock Market Bubbles and Business Cycles,  with Jianjun Miao and Zhiwei Xu,  PDF, Quantitative Economics, 2015, 6(3), pp.599-635.

8.    Two-Way Capital Flows and Global Imbalances, with Wen Yi and Zhiwei Xu, PDF, Forthcoming: Economic Journal.

9.    Banking Bubbles and Financial Crisis, with Jianjun Miao, PDF, Journal of Economic Theory, 2015, 157, pp.763-792.

10.  Sentiments and Aggregate Demand Fluctuations, with Jess Benhabib and Yi Wen, PDF, Econometrica, 2015, 83(2), pp.549-585.

11.  Private Information and Sunspots in Sequential Asset Market, with Jess Benhabib,  PDF, Journal of Economic Theory, 2015, 148, pp558-584.

12.  What Inventories Tell us about Aggregate Fluctuations—A Tractable Approach to (S,s) Policies, PDF, with Yi Wen and Zhiwei Xu, Journal of Economic Dynamics and Control, 2014, 44, pp. 196-217.

13.  Sectoral Bubbles and Endogenous Growth, with Jianjun Miao, PDF, Journal of Mathematical Economics, 2014, pp. 153-163.

14.  Lumpy Investment and Corporate Tax Policy, with Jianjun Miao, PDF, Journal of Money, Credit, and Banking, 2014, 46(6), pp. 1171-1203.

15.  A Q-Theory Model with Lumpy Investment, with Jianjun Miao, PDF, Economic Theory, 2014, 57(1), pp. 133-159.

16.  Credit Constraints and Self-fulfilling Business Cycles, with Zheng Liu, PDF, American Economic Journal: Macroeconomics, 2014, 6(1): 32-69.

17.  Financial Constraints, Endogenous Markups, and Self-fulfilling Equilibria, with Jess Benhabib, PDF, Journal of Monetary Economics, 2013 October, 60 (7), pp. 789-805.

18.  Land-Price Dynamics and Macroeconomic Fluctuation, with Zheng Liu and Tao Zha, PDF, Econometrica, May 2013, 81(3), pp. 1147-1184.

19.  Speculative Bubbles and Financial Crisis, with Yi Wen, PDF, American Economic Journal: Macroeconomics, July 2012, 4(3), pp.184-221.

20.  Bubbles and Total Factor Productivity, with Jianjun Miao, PDF, American Economic Review Papers and Proceedings, May 2012, 102(3), pp.82-87.

21.  Hayashi Meets Kiyotaki and Moore: A Theory of Capital Adjustment Costs, with Yi Wen,  PDF,  Review of Economic Dynamics, April 2012, 15(2), pp.207-255.

22.  Understanding Expectation-Driven Fluctuations-A Labor-Market Approach, PDF,  Journal of Money, Credit, and Banking, March 2012, 44(2-3), pp.487-506.

23.  Understanding the Effects of Technology Shocks, with Yi Wen, PDF, Review of Economic Dynamics, October 2011, 14(4),  pp.705-724.

24.  Volatility, Growth, and Welfare, with Yi Wen, PDF, Journal of Economic Dynamics and Control, October 2011, 35(10),  pp.1696-1709.

25.  Imperfect Competition and Indeterminacy of Aggregate Output , with Yi Wen, PDF, Journal of Economic Theory, November 2008, 143(1), pp. 519-40.

26.  Inflation Dynamics: A Cross-Country Investigation, with Yi Wen, PDF, Journal of Monetary Economics, October 2007, 54, pp. 2004-31.

27.  Another Look at Sticky Prices and Output Persistence, with Yi Wen, PDF, Journal of Economic Dynamics and Control, December 2006, 30(12), pp. 2533-52.

28.  Endogenous Money or Sticky Prices? Comment on Monetary Non-Neutrality and Inflation Dynamics, with Yi Wen, PDF, Journal of Economic Dynamics and Control, August 2005, 29(8), pp. 1361-83.

Working Papers

·          Financial Markets, the Real Economy, and Self-fulfilling Uncertainties, with Jess Benhabib and Xuewen Liu,  PDF, March 2017.


Abstract: Uncertainty in both financial markets and the real economy rises sharply during recessions. We develop a model of informational interdependence between financial markets and the real economy, linking uncertainty to information production (acquisition) and aggregate economic activities to explain this intriguing empirical fact. We argue that there exists mutual learning between financial markets and the real economy. Their joint information productions determine both the real production efficiency in the real sector and the price efficiency in the financial sector. The mutual learning makes information production in the financial sector and that in the real sector a strategic complementarity. A self-fulfilling surge in financial uncertainty and real uncertainty can naturally arise when both sectors produce little information in anticipation of the other sector to do so. At the same time, aggregate output falls as the real production efficiency deteriorates. Our model has other implications on aggregate economic activities.


·          Asset Bubbles and Monetary Policy, with Feng Dong and Jianjun Miao and, PDF, January 2017.


Abstract: We provide an infinite-horizon model of rational asset bubbles in a Dynamic New Keynesian framework. Entrepreneurs are heterogeneous in investment efficiency and face credit constraints. They can trade land as an asset, which also serves collateral to borrow from banks with reserve requirements. Land commands a liquidity premium and a land bubble can emerge. Monetary policy can affect the condition for the existence of a bubble, its steady-state size, and its dynamics including the initial size. The `leaning against the wind' interest rate policy will reduce the bubble volatility, but it may come at the cost of raising the inflation volatility. Whether monetary policy should respond to asset bubbles depends on the particular interest rate rule adopted by the central bank and on the exogenous shocks hitting the economy.


·          Asset Bubbles and Foreign Interest Rate Shocks, with Jianjun Miao and Jing Zhou, PDF, December 2016.   

Abstract: We provide an infinite-horizon general equilibrium model of a small open economy with both domestic and international financial market frictions. Firms face credit constraints and use a bubble asset (land) as collateral to borrow. A land bubble can provide liquidity and relax credit constraints. Low foreign interest rates are conducive to bubble formation. A rise in foreign interest rate can cause the collapse of the asset bubble and a sudden stop. Asset bubbles provide an important amplification mechanism.


·          Saving China’s Stock Market, with Jianjun Miao and Yi Huang, PDF, August 2016  VoxEU


Abstract: What are the economic benefits and costs of preventing a stock market meltdown during the summer of 2015 by the Chinese government intervention? We answer this question by estimating the value creation for the stocks purchased by the government between the period starting with the market crash in mid-June and the market recovery in September. We find that the government intervention increased the value of the rescued firms with a net benefit between RMB 2,464 and 3,402 billion, which is about 5% of the Chinese GDP in 2014. The value creation came from the increased stock demand by the government, the reduced default probabilities, and the increased liquidity.

·          Financial Development and Economic Volatility: a Unified Explanation, with Wen Yi, PDF, Under Revision, First Version July 2009.   

Abstract: We present a model with heterogeneous firms, in which credit constraints may give rise to self-fulfilling, sunspot-driven business cycle fluctuations. We derive optimal incentive-compatible loan contracts, under which a firm’s borrowing capacity is constrained by expected equity value. Interactions between debt and equity value made possible by credit constraints generate a credit externality, which leads to procyclical total factor productivity (TFP) and, with sufficiently high cost of financial intermediation, to equilibrium indeterminacy. At the aggregate level, the credit externality is observationally equivalent to production externality. Aggregate dynamics in our model with credit constraints and constant returns technology at the firm level are isomorphic to those in an aggregate economy with increasing returns, such as that studied by Benhabib and Farmer (1994).



·          Bubbles and Credit Constraints, with Jianjun Miao, PDF, Under Revision, First Version in December 2010 .


Abstract: We provide an infinite-horizon model of a production economy with credit-driven bubbles, in which firms meet stochastic investment opportunities and face credit constraints. Capital is not only an input for production, but also serves as collateral. We show that bubbles on this reproducible asset may arise, which relax collateral constraints and improve investment efficiency. The collapse of bubbles leads to a recession and a stock market crash. We show that there is a credit policy that can eliminate the bubble on firm assets and can achieve the efficient allocation.


·          Adverse Selection and Self-fulfilling Business Cycles,  with Jess Benhabib and Feng Dong  PDF,  October 2014.

Abstract: We develop a macroeconomic model with adverse selection. A continuum of households purchase goods from a continuum of anonymous producers. The quality of products can only be learned after trade. Adverse selection arises as low-quality goods deliver higher profits for producers but are less desirable for households. Higher aggregate demand induces more high-quality goods, raises average quality, and drives up household demand. We show that this demand externality can generate multiple equilibria or indeterminacy even when the steady state equilibrium is unique, making self-fulfilling expectation driven business cycles possible. Indeterminacy arising from adverse selection in credit markets is also constructed.


·          Liquidity Premia, Price-Rent Dynamics and Business Cycles, with Jianjun Miao and Tao Zha  PDF,  March 2014.

Abstract: This paper provides a theory of credit-driven housing bubbles in an infinite-horizon production economy. Entrepreneurs face idiosyncratic investment tax distortions and credit constraints. Housing is an illiquid asset and also serves as collateral for borrowing. A housing bubble can form because houses command a liquidity premium. The housing bubble can provide liquidity and relax credit constraints, but can also generate inefficient overinvestment. Its net effect is to reduce welfare. Property taxes, Tobin's taxes, macroprudential policy, and credit policy can prevent the formation of a housing bubble.


·          Uncertainty and Sentiment-Driven Equilibria, with Jess Benhabib and Yi Wen, PDF, March 2013

Abstract: We formalize the Keynesian insight that aggregate demand driven by sentiments can generate output fluctuations under rational expectations. When production decisions must be made under imperfect information about aggregate demand, optimal decisions based on sentiments can generate stochastic self-fulfilling rational expectations equilibria in standard economies without aggregate shocks, externalities, persistent informational frictions, or even any strategic complementarity. Our general-equilibrium model is deliberately simple, but could serve as a benchmark for more complicated equilibrium models with additional features.

·         Financial Development and Aggregate Saving Rates:  A Hump-Shaped Relationship, with Lifang Xu and Zhiwei Xu , PDF, October 2011.


Abstract: This study has documented a hump-shaped empirical relationship between financial development and the national saving rate across 102 countries. An incomplete-market model featuring both heterogeneous households and heterogeneous firms is provided to explain this hump-shaped relationship. The key insight of the model is that financial development tends to reduce the precautionary-saving incentives of households but increase firms' ability to borrow and invest. As a result, the aggregate saving rate may rise initially with financial development because of greater investment by firms, but then declines with further financial development because of substantially reduced precautionary savings by households. The model also predicts that the market interest rate lies substantially below the rate of return to capital in emerging economies, but the gap diminishes with financial development, as observed in the data.


·          Credit Risk and Business Cycles, with Jianjun Miao, PDF, September, 2010. 

Abstract: We incorporate long-term defaultable corporate bonds and credit risk in a dynamic stochastic general equilibrium business cycle model. Credit risk amplifies aggregate technology shocks. The debt-capital ratio is a new state variable and its endogenous movements provide a propagation mechanism. The model can match the persistence and volatility of output growth as well as the mean equity premium and the mean risk-free rate as in the data. The model implied credit spreads are countercyclical and forecast future economic activities because they affect firm investment through Tobin's Q. They also forecast future stock returns through changes in the market price of risk. Finally, we show that financial shocks to the credit markets are transmitted to the real economy through Tobin's Q.


·          Inventory Accelerator in General Equilibrium, with Yi Wen,  PDF, March 2009.

Abstract: We develop a general-equilibrium model of inventories with explicit microfoundations by embedding the production-cost smoothing motive (e.g., Eichenbaum, 1989) into a DSGE model with imperfect competition. We show that monopolistic firms facing idiosyncratic cost shocks have incentives to bunch production and smooth sales by carrying inventories. The model is broadly consistent with key stylized facts of aggregate inventory fluctuations, such as the procyclical inventory investment and the countercyclical inventory-to-sales ratio. In addition, the model yields novel predictions for the role of inventories in macroeconomic stability: Inventories may greatly amplify and propagate the business cycle, provided that markups or the variance of idiosyncratic cost shocks are sufficiently large. That is, a strong incentive to accumulate inventories under the cost-smoothing motive at the firm level may give rise to hump-shaped aggregate output dynamics and significantly higher volatility of GDP. Such predictions are in contrast to the implications of the recent general-equilibrium inventory literature, which shows that inventory investment induced by more conventional mechanisms (e.g., the stockout-avoidance motive and the (S,s) rule) does not increase the variance of aggregate output.

·          Trade, Sectorial Reallocation and Growth,  with Danyang Xie,  PDF, Revised in September 2014, , First Version, September 2008.

Abstract: This paper introduces sectorial heterogeneity in TFPs in a growth model driven by an exogenous process of labor specialization to generate new insights on trade and economic growth. Despite the exogeneity of labor specialization, the overall economic growth rate in this model is endogenously determined and depends in a closed economy on the distribution of labor intensity across sectors. Our model could thus be labeled as a semi-endogenous growth model in the sense of Jones (1995). When the model is extended to allow for international trade, we find that the overall growth rate is unambiguously higher as the number of trading partners increases. There are two effects working in the same direction contributing to this result: the resource re-allocation effect and the total product-variety effect. On the other hand, the growth effect of the reduction in trade-related fixed cost is non-monotonic because the two effects work in opposite directions.


·          Solving Linear Difference Systems with Lagged Expectation by a Method of Undetermined Coefficients, with Yi Wen,  PDF, January 2006, Revised May 2006. Matlab Codes.

Abstract: This paper proposes a solution method to solve linear difference models with N lagged expectations. Variables with lagged expectations expand the model's state space greatly when N is large; and getting the system into a canonical form solvable by the traditional methods involves substantial manual work, which is prone to human errors. Our method avoids the need of expanding the state space of the system and shifts the burden of analysis from the individual economist/model solver toward the computer. Hence it can be a very useful tool in practice, especially in testing and estimating economics models with a high order of lagged expectations. Examples are provided to demonstrate the usefulness of the method. We also discuss the implications of lagged expectations on the equilibrium properties of indeterminate DSGE models, such as the serial correlation properties of sunspots shocks in these models.