Working Papers
We show that quantitative easing (QE) worsens government debt sustainability. In our model, the government runs a primary deficit with elastic debt demand that makes interest rates endogenous. The central bank has long-term capital and remits profits to the fiscal authority. QE depletes this capital stock, reducing future remittances and crisis-fighting reserves. Contrary to Sargent and Wallace (1981), where greater monetary accommodation lowers the steady-state debt level, we show that QE increases the steady-state level of debt and shifts the default boundary inward, thus heightening fragility and reducing debt sustainability. Moreover, while QE can keep interest rates low for extended periods, continued debt accumulation eventually triggers a sharp rise in financing costs. Under certain parameters, large-scale QE makes previously sustainable debt levels unsustainable, leading ultimately to sovereign default.
BibTeX
@unpublished{merkel2026quantitative,
author = {Merkel, Sebastian and Li, Wenhao},
title = {Quantitative Easing and Government Debt Sustainability},
year = {2026},
note = {Working Paper},
url = {https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5743942}
}
APA
Merkel, S., & Li, W. (2026). Quantitative easing and government debt sustainability. Working Paper. Available at SSRN: https://ssrn.com/abstract=5743942
Best Paper Award, JHU Carey Finance Conference 2024
We construct a novel dataset of sector-level U.S. Treasury holdings, covering the majority of the market. Using this dataset, we estimate maturity-specific demand functions and elasticities of different investors and the Fed, and integrate them into a dynamic equilibrium model of the Treasury market with risk-averse arbitrageurs. Quantifying the model reveals that (1) there is a steep downward-sloping term structure of Treasury market elasticity; (2) monetary tightening raises term premia due to arbitrageurs interacting with investors exhibiting high cross-elasticities; (3) QE has limited impact unless the Fed credibly commits to sustained balance sheet expansion.
BibTeX
@unpublished{jansen2025granular,
author = {Jansen, Kristy and Li, Wenhao and Schmid, Lukas},
title = {Granular Treasury Demand with Arbitrageurs},
year = {2025},
note = {NBER Working Paper No. 33243},
url = {https://www.nber.org/papers/w33243}
}
APA
Jansen, K., Li, W., & Schmid, L. (2025). Granular treasury demand with arbitrageurs. NBER Working Paper No. 33243.
Revise & Resubmit at The Journal of Finance
We document that U.S. Treasury convenience moved positively with inflation during the inflationary second half of the 20th century but not before WWII or after 2000. A macro-asset pricing model explains this shift through two channels. Inflationary supply shocks raise the opportunity cost of holding money and money-like assets, endogenously increasing convenience yields. In contrast, exogenous liquidity demand shocks elevate convenience but depress consumption and inflation. Model estimates show that spikes in liquidity demand after 2000 account for the weaker convenience–inflation link and the emergence of negative bond-stock betas, distinguishing liquidity from non-liquidity demand shocks.
BibTeX
@unpublished{cieslak2024inflation,
author = {Cieslak, Anna and Li, Wenhao and Pflueger, Carolin},
title = {Inflation and Treasury Convenience},
year = {2024},
note = {NBER Working Paper No. 32881. Revise and Resubmit, \textit{The Journal of Finance}},
url = {https://www.nber.org/papers/w32881}
}
APA
Cieslak, A., Li, W., & Pflueger, C. (2024). Inflation and treasury convenience. NBER Working Paper No. 32881.
We analyze the term structure of Treasury liquidity premium (LP). Through a model where illiquidity shocks are alleviated by holding Treasuries, we show that LP term structure is shaped by expectations of future market liquidity, liquidity term premium, and Treasury supply. As predicted, the LP term structure is downward-sloping in recessions but upward-sloping in booms, and forward LP predicts future LP and market liquidity. Furthermore, LP is quantitatively important for monetary policy pass-through: LP dampens the pass-through of interest rate policy yet strengthens the pass-through of quantitative easings. We also use LP to infer the term structure of Treasury safety premium.
BibTeX
@unpublished{joslin2021term,
author = {Joslin, Scott and Li, Wenhao and Song, Yang},
title = {The Term Structure of Liquidity Premium},
year = {2021},
note = {Working Paper},
url = {https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3476730}
}
APA
Joslin, S., Li, W., & Song, Y. (2021). The term structure of liquidity premium. Working Paper. Available at SSRN: https://ssrn.com/abstract=3476730
Published Papers
Journal of Financial Economics, forthcoming 2026
Arthur Warga Award for Best Paper in Fixed Income, SFS Cavalcade, 2020
We demonstrate the passthrough of Treasury supply to bank deposits through bank market power. We show that a larger Treasury supply crowds out deposits with disproportionate effects in more competitive deposit markets. A larger Treasury supply further curtails bank lending and affects bank funding structure. The explanatory power of Treasury supply is not driven by other shocks to deposit demand and supply. In comparison, monetary policy rate hikes have a larger impact on deposit funding in more concentrated markets, consistent with the deposits channel of monetary policy. Our empirical findings are rationalized in a model of imperfect deposit competition.
BibTeX
@article{li2026passthrough,
author = {Li, Wenhao and Ma, Yiming and Zhao, Yang},
title = {The Passthrough of Treasury Supply to Bank Deposit Funding},
journal = {Journal of Financial Economics},
year = {2026},
note = {Forthcoming},
url = {https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3311314}
}
APA
Li, W., Ma, Y., & Zhao, Y. (2026). The passthrough of treasury supply to bank deposit funding. Journal of Financial Economics, forthcoming.
Media: Central Banking · PR Newswire
Review of Economic Studies, 2025
A salient trend in crisis intervention has emerged in recent decades: Government and central banks offered funding directly to nonfinancial firms, bypassing banks and other credit intermediaries. We analyze the long-term consequences of such policies by focusing on firm quality dynamics. In a laissez-faire economy, firms with high productivity are more likely to survive crises than those with low productivity. The government funding support saves more firms but cannot be customized based on firm productivity, dampening the cleansing effect of crises. The policy distortion is self-perpetuating: A downward bias in firm quality distribution necessitates interventions of greater scale in future crises. Our mechanism is quantitatively important: we show that if policy makers ignore such distortionary effects on firm quality dynamics, the resultant credit intervention would almost double the optimal amount.
BibTeX
@article{li2025firm,
author = {Li, Wenhao and Li, Ye},
title = {Firm Quality Dynamics and the Slippery Slope of Credit Intervention},
journal = {The Review of Economic Studies},
year = {2025},
doi = {10.1093/restud/rdaf100}
}
APA
Li, W., & Li, Y. (2025). Firm quality dynamics and the slippery slope of credit intervention. The Review of Economic Studies. https://doi.org/10.1093/restud/rdaf100
Journal of Political Economy, 2025
We develop a model of financial crises with both a financial amplification mechanism, via frictional intermediation, and a role for sentiment, via time-varying beliefs about an illiquidity state. The model accounts for the entire crisis cycle, matching data on the frothy pre-crisis behavior of asset markets and credit, the sharp transition to a crisis where asset values fall, disintermediation occurs and output falls, and the slow postcrisis recovery in output. Both the intermediation and belief mechanism are essential to match the crisis cycle. However, modeling the belief variation via either a Bayesian or diagnostic model can match the broad patterns.
BibTeX
@article{krishnamurthy2025dissecting,
author = {Krishnamurthy, Arvind and Li, Wenhao},
title = {Dissecting Mechanisms of Financial Crises: Intermediation and Sentiment},
journal = {Journal of Political Economy},
year = {2025},
volume = {133},
number = {3},
pages = {935--985},
doi = {10.1086/733423}
}
APA
Krishnamurthy, A., & Li, W. (2025). Dissecting mechanisms of financial crises: Intermediation and sentiment. Journal of Political Economy, 133(3), 935–985. https://doi.org/10.1086/733423
American Economic Journal: Macroeconomics, 2025
2019 Cubist Systematic Strategies Ph.D. Candidate Award for Outstanding Research
This paper studies the equilibrium effect of public liquidity on financial crises. Banks borrow from households via insured deposits and partially runnable debt, and suffer endogenous funding withdrawals from households in crises. Holding public liquidity alleviates banks' liquidity problems. In equilibrium, a larger public liquidity supply reduces crisis severity, expands bank lending, but crowds bank deposits and increases bank vulnerability to real shocks. The model quantitatively explains 40% of Treasury liquidity premium variations. Counterfactual analyses reveal that QE1 significantly improves output, 20 times larger than QE3. However, QE infinity during COVID-19 increases bank fragility to real shocks and reduces output.
BibTeX
@article{li2025public,
author = {Li, Wenhao},
title = {Public Liquidity and Financial Crises},
journal = {American Economic Journal: Macroeconomics},
year = {2025},
volume = {17},
number = {2},
pages = {245--284},
doi = {10.1257/mac.20210412}
}
APA
Li, W. (2025). Public liquidity and financial crises. American Economic Journal: Macroeconomics, 17(2), 245–284. https://doi.org/10.1257/mac.20210412
Computational Economics, 2025
We develop a methodology that utilizes deep learning to simultaneously solve and estimate canonical continuous-time general equilibrium models in financial economics. We illustrate our method in two examples: (1) industrial dynamics of firms and (2) macroeconomic models with financial frictions. Through these applications, we illustrate the advantages of our method: generality, simultaneous solution and estimation, leveraging the state-of-art machine-learning techniques, and handling large state space. The method is versatile and can be applied to a vast variety of problems.
BibTeX
@article{fan2025deep,
author = {Fan, Benjamin and Qiao, Edward and Jiao, Anran and Gu, Zhouzhou and Li, Wenhao and Lu, Lu},
title = {Deep Learning for Solving and Estimating Dynamic Macro-finance Models},
journal = {Computational Economics},
year = {2025},
volume = {65},
number = {6},
pages = {3885--3921},
doi = {10.1007/s10614-024-10693-3}
}
APA
Fan, B., Qiao, E., Jiao, A., Gu, Z., Li, W., & Lu, L. (2025). Deep learning for solving and estimating dynamic macro-finance models. Computational Economics, 65(6), 3885–3921. https://doi.org/10.1007/s10614-024-10693-3
Journal of Financial Economics, 2023
We document a regime change in the Treasury market post-Global Financial Crisis (GFC): dealers switched from net short to net long Treasury bonds. We construct “net-long” and “net-short” curves that account for balance sheet and financing costs, and show that actual yields moved from the net short curve pre-GFC to the net long curve post-GFC. Our theory shows the regime shift caused negative swap spreads and co-movement among swap spreads, dealer positions, and covered-interest-parity violations. Furthermore, the effects of various monetary and regulatory policies are regime-dependent. We highlight Treasury supply as a plausible driver of this regime shift.
BibTeX
@article{du2023intermediary,
author = {Du, Wenxin and H\'{e}bert, Benjamin and Li, Wenhao},
title = {Intermediary Balance Sheets and the Treasury Yield Curve},
journal = {Journal of Financial Economics},
year = {2023},
volume = {150},
number = {3},
pages = {103722},
doi = {10.1016/j.jfineco.2023.103722}
}
APA
Du, W., Hébert, B., & Li, W. (2023). Intermediary balance sheets and the treasury yield curve. Journal of Financial Economics, 150(3), 103722. https://doi.org/10.1016/j.jfineco.2023.103722
Review of Financial Studies, 2023
Arthur Warga Award for Best Paper in Fixed Income, SFS Cavalcade, 2022
Bank-created money, shadow-bank money, and Treasury bonds all satisfy investors' demand for a liquid transaction medium and safe store of value. We measure the quantity of these forms of liquidity and their corresponding liquidity premia over a sample from 1934 to 2016. We empirically examine the links between these different assets, estimating the extent to which they are substitutes, and the amount of liquidity per-unit delivered by each asset. Treasury bonds and bank transaction deposits are imperfect substitutes, in contrast to the finding of perfect substitutes of Nagel (2016). Bank and shadow-bank non-transaction deposits are closer substitutes for Treasuries, but provide less liquidity per-unit of asset than Treasuries. The results are directly relevant to the monetary transmission mechanism running through shifts in asset supplies, such as quantitative easing policies. Our results on the imperfect substitutability of bank and shadow-bank money also inform analyses of the coexistence of the shadow-banking and regulated banking system. We construct a new broad monetary aggregate based on our estimates and show that it helps resolve the money-demand instability and missing-money puzzles of the monetary economics literature.
BibTeX
@article{krishnamurthy2023demand,
author = {Krishnamurthy, Arvind and Li, Wenhao},
title = {The Demand for Money, Near-Money, and Treasury Bonds},
journal = {The Review of Financial Studies},
year = {2023},
volume = {36},
number = {5},
pages = {2091--2130},
doi = {10.1093/rfs/hhac074}
}
APA
Krishnamurthy, A., & Li, W. (2023). The demand for money, near-money, and treasury bonds. The Review of Financial Studies, 36(5), 2091–2130. https://doi.org/10.1093/rfs/hhac074