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Journal Article
Dynamics of externalities: a second-order perspective
Wen, Yi; Wu, Huabin (2011-05)
First-order approximation methods are a standard technique for analyzing the local dynamics of dynamic stochastic general equilibrium (DSGE) models. Although linear methods yield quite accurate solutions for a broad class of DSGE models, some important economic issues (e.g., portfolio choice and welfare) cannot be adequately addressed by first-order methods. This paper provides yet another case when first-order methods may be inadequate for capturing the business cycle properties of a DSGE model. In particular, the authors show that increasing returns to scale (due to production ...
Review , Volume 93 , Issue May , Pages 187-206

Working Paper
Production and inventory behavior of capital
Wen, Yi (2005)
This paper provides a dynamic optimization model of durable good inventories to study the interactions between investment demand and production of capital goods. There are three major findings: First, capital suppliers' inventory behavior makes investment demand more volatile in equilibrium; Second, equilibrium price of capital is characterized by downward stickiness; Third, the responses of the capital market to interest rate and other environmental changes are asymmetric. All are the results of equilibrium interactions between demand and supply.
Working Papers , Paper 2005-044

Working Paper
The Visible Hand: The Role of Government in China’s Long-Awaited Industrial Revolution
Wen, Yi; Fortier, George E. (2016-08-01)
China is undergoing its long-awaited industrial revolution. There is no shortage of commentary and opinion on this dramatic period, but few have attempted to provide a coherent, in-depth, political economic framework that explains the fundamental mechanisms behind China?s rapid industrialization. This article reviews the New Stage Theory of economic development put forth by Wen (2016a). It illuminates the critical sequence of developmental stages since the reforms enacted by Deng Xiaoping in 1978: namely, small-scale commercialized agricultural production, proto-industrialization in the ...
Working Papers , Paper 2016-16

Working Paper
When do inventories destabilize the economy? an analytical approach to (S,s) policies
Wen, Yi; Wang, Pengfei; Xu, Zhiwei (2011)
Conventional wisdom has it that inventory investment destabilizes the economy because it is procyclical to sales. Khan and Thomas (2007) show that the conventional wisdom is wrong in a general equilibrium (S,s) model with capital. We argue that their finding is not robust?the conventional wisdom can still hold in general equilibrium if firms can adjust output by varying the capacity utilization rate. Our result also holds true if there exist investment adjustment costs. Unlike the existing (S,s) inventory literature that relies on the Krusell-Smith (1998) numerical solution methods, we ...
Working Papers , Paper 2011-014

Journal Article
Secured and Unsecured Debt Over the Business Cycle
Wen, Yi; Arias, Maria A. (2017)
Unsecured debt better predicts economic activity than secured debt
Economic Synopses , Issue 1 , Pages 1-2

Working Paper
Capital, finance, and trade collapse
Wen, Yi; Jiao, Yang (2012)
This paper proposes a model of international trade with capital accumulation and financial intermediation. This is achieved by embedding the Melitz (2003) model into an incomplete-markets neoclassical framework with an endogenous credit market. The model preserves the analytical tractability of the original Melitz model despite non-trivial distribution of firms? net worth and capital stocks. We use the model to examine the differential effects of financial and non-financial shocks on aggregate output and international trade flows. The model predicts that trade volume declines far more sharply ...
Working Papers , Paper 2012-003

Working Paper
Optimal Monetary Policy under Negative Interest Rate
Wen, Yi; Dong, Feng (2017-05-16)
In responding to the extremely weak global economy after the financial crisis in 2008, many industrial nations have been considering or have already implemented negative nominal interest rate policy. This situation raises two important questions for monetary theories: (i) Given the widely held doctrine of the zero lower bound on nominal interest rate, how is a negative interest rate (NIR) policy possible? (ii) Will NIR be effective in stimulating aggregate demand? (iii) Are there any new theoretical issues emerging under NIR policies? This article builds a model to show that (i) money ...
Working Papers , Paper 2017-19

Working Paper
Imperfect competition and indeterminacy of aggregate output
Wen, Yi; Wang, Pengfei (2007)
This paper shows imperfect competition can lead to indeterminacy in aggregate output in a standard DSGE model with imperfect competition. Indeterminacy arises in the model from the composition of aggregate output. In sharp contrast to the indeterminacy literature pioneered by Benhabib and Farmer [3] and Gali [19], indeterminacy in our model is global; hence it is more robust to structural parameters. In addition, sunspots in our model can be autocorrelated. The paper provides a justification for exogenous variations in desired markups, which play an important role as a source of cost-push ...
Working Papers , Paper 2006-017

Working Paper
The Ramsey Steady-State Conundrum in Heterogeneous-Agent Economies
Wen, Yi; Chien, YiLi (2022-09-15)
In infinite horizon, heterogeneous-agent and incomplete-market models, the existence of an interior Ramsey steady state is often assumed instead of proven. This paper makes two fundamental contributions: (i) We prove that the interior Ramsey steady state assumed by Aiyagari (1995) does not exist in the standard Aiyagari model. Specifically, a steady state featuring the modified golden rule and a positive capital tax is feasible but not optimal. (ii) We design a modified, analytically tractable version of the standard Aiyagari model to unveil the necessary and/or sufficient conditions for the ...
Working Papers , Paper 2022-009

Early U.S. Trade Deficits and Industrialization
Wen, Yi; Reinbold, Brian (2020-07-20)
Trade deficits during the country’s first phase of industrialization did not inhibit U.S. development and may have facilitated industrialization.
On the Economy

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