Price Convergence Through a Financial Network (Link)

Abstract: How does financial integration impact price integration in real sectors? Using newly hand-collected data from a domestic exchange market during the Chinese Civil War (1945-1949), I model the connection between these two integrations measured respectively by capital flow costs (or domestic exchange rates) and commodity relative prices across cities. I use battle shocks to a financial hub in the exchange network to identify the impact of exchange rates on price convergence between a city pair connected to the hub. I find that (1) city pairs with a direct domestic exchange link exhibited faster commodity price convergence than others; (2) battles around financial hubs tended to raise capital flow costs between a connected city pair, decelerating price convergence by 4% - 8%; (3) a weak form of purchasing power parity holds: a 1% depreciation in the domestic exchange rates was associated with a 0.2%-0.3% reduction in inflation rate differentials; and (4) a higher inflation rate did not impede or strengthen the price convergence channel via domestic exchanges. These results imply that China's financial development was more sophisticated than expected relative to its status as an agricultural economy in the early 20th century.

A Bond Price Puzzle: A Partial Hedge against Chinese Hyperinflation (Link)

This paper studies how bond traders' extreme beliefs of repayments led to bond market anomalies. The conventional valuation model states that the value of a bond is the sum of the present values of its future cash flows. However, the prices of the consolidated government bonds soared up to thousands of times their face values from 1946 to 1948 during the Chinese Civil War. I find that (1) the bond prices anchored the Shanghai wholesale price index amid hyperinflation; (2) the extreme price pattern was primarily explained by the bond traders’ evolving belief that the government would repay the bonds with an appropriate multiplier after implementing the Currency Reform; (3) the belief was significantly affected by relevant news about repayment. On a weekly average basis, one more positive news about the Currency Reform will lead to an 8.8 percentage points increase in bond price growth rate, while one additional negative news about the repayment with multipliers will decelerate the growth rate by 8.2 percentage points; and (4) at least before the eve of the Currency Reform, the Shanghai financial markets were not sensitive to political uncertainties resulting from the Civil War.

Shock Propagation through a Production Network: the Effect of Bombings towards Germany’s Production (Link)

This paper builds a two-layer supply chain framework in a static centralized economy to investigate the propagation of a productivity shock across sectors. It shows that a productivity shock can be transmitted downstream (from an intermediate goods sector to a final goods sector), upstream, or horizontally (from a final goods sector to another sector). A negative shock incurred by a sector may hurt another sector if they are linked directly, but will always stimulate the production in an indirectly-linked sector. Using detailed bombing data and production index across armament sectors during the Second World War, this paper investigates whether a shock caused by the Allied’s strategic bombing towards Nazi Germany propagated through the production network. The empirical results fit the theoretical model well.



Treaty Ports and Modernization in China (with Boxiao Zhang)

Abstract: This project shows that expanding market access to foreign trade is an underlying mechanism through which treaty ports had boosted China's modernization. We step further than literature by evaluating the impact of opening treaty ports in a more general trade framework. Using monthly grain prices of each prefecture during 1736-1911 and adopting Donaldson's (2018, AER) idea, we first obtain a better estimate of trade costs by calculating the lowest-cost route in a GIS map. We then construct a market access index of each prefecture to foreign trade based on newly collected trade flows data between treaty ports, each prefecture's population, and the estimated trade costs. Finally, we examine the effects of market access index both on industrialization and development variables, such as the urbanization rate, the number of newly built firms, and the GDP of each prefecture after the 1980s. Our results show that prefectures benefited from being closer to treaty ports and the associated spillover effects.



"An Essay on the Asymptotic Property of Borda Rule'' (in Chinese), Review of New Political Economics, 2011, vol. 18, pp. 1-25.