Published papers

The debt overhang of sovereigns or firms is modeled in the recent literature as a constrained efficient outcome of dynamic debt contracts under the lack of the borrower's commitment, where debt relief is not Pareto-improving. The early literature observes another type of debt overhang where the borrower is discouraged from expending effort, anticipating the lender to take all output ex post. We show that this inefficiency is due to the lack of the lender's commitment and debt relief is Pareto-improving. Nevertheless, debt overhang may persist, as frictional bargaining over debt relief can take a long time.

In this study, we construct a variant of the Lagos–Wright monetary model in which both buyers and sellers optimally decide whether to enter decentralized market by paying fixed entry costs. In the decentralized market, the sellers produce the intermediate inputs which are necessary to produce the general good traded in the centralized market. We show that the Friedman rule of setting nominal interest rate to zero may not be optimal. The optimal inflation rate is derived explicitly for specific functional forms. It is shown that the optimal inflation rate is lower for lower buyer entry costs, because the lower entry costs generate the buyer's congestion leading to lower benefit from holding money, which must be balanced by lower cost of money holdings. It is also shown that the optimal inflation is lower for higher seller entry costs.

The primary contribution of modern economics to policy analysis may be the recognition of the crucial role of expectations in policy intervention. The essence of expectations is to think about others’ thinking. We argue that policymakers need recursive thinking, that is, the ability to think about thinking and review three policy episodes related to the lack of recursive thinking. We see that the disciplinary divide or the limited scope of recursive thinking on the side of policymakers can cause huge damage to social welfare in times of crisis. Finally, we consider two examples of future agendas in the recursive approach.

In this study, we explain the driving forces behind the secular stagnation associated with a persistent decrease in interest rates by employing a model that incorporates a crisis risk triggered by government debt accumulation. The model shows that fear of large-scale capital taxation and capital misallocation in future debt crises accounts for almost half the economic slowdown in Japan over the past two decades. Over the same period, the government bond yield declines, because a decrease in the expected returns on capital makes investing in government bonds more attractive than investing in capital.