Browse by research area
Working Papers
Topics: quantitative easing; central-bank balance sheets; fiscal sustainability. Area: Government Debt Valuation and Sustainability.
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@unpublished{merkel2026quantitative,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 = {Li, Wenhao and Merkel, Sebastian},
title = {Quantitative Easing and Government Debt Sustainability},
year = {2026},
note = {NBER Working Paper No. 35421},
url = {https://www.nber.org/papers/w35421}
}
AEA
Li, Wenhao, and Sebastian Merkel. 2026. “Quantitative Easing and Government Debt Sustainability.” NBER Working Paper 35421.
Financial Market Drivers of Fiscal Policy
Topics: interest-service costs; primary surpluses; fiscal sustainability. Area: Government Debt Valuation and Sustainability.
We study how financial markets shape fiscal policy through government interest-service costs. Using two centuries of historical data, we show that higher interest-service costs induce governments to raise primary surpluses. By lowering these costs, central-bank balance-sheet expansions delay fiscal adjustment and further weaken debt sustainability.
Beliefs about Government Debt Valuation and Sustainability
Topics: government debt valuation; investor beliefs; safe-asset demand. Area: Government Debt Valuation and Sustainability.
We study what investors and voters believe supports the value of U.S. government debt. In survey evidence from bond investors and registered voters, we ask respondents to allocate debt value across future primary surpluses, safe-asset demand, rollover, central-bank support, government assets, and financial repression. Many respondents put less weight on future surpluses than standard fiscal theories imply, while assigning substantial weight to safe-asset demand and central-bank support. The findings help explain why U.S. debt can appear stable despite weak fiscal fundamentals, but also why that stability may be fragile if beliefs supporting Treasury safe-asset status shift.
Dissecting Treasury Market Resilience
Topics: Treasury-market resilience; investor demand; Fed balance-sheet policy. Area: Treasury Markets and Financial Intermediation.
We study what makes the Treasury market resilient: how far yields must move before investors absorb shocks. The paper asks how resilience depends on the marginal holder, maturity, shock persistence, foreign demand, arbitrageur capacity, and Federal Reserve balance-sheet policy. The analysis shifts attention from the total quantity of debt to the market structure and policy design that determine who absorbs Treasury-market stress.
Best Paper Award, JHU Carey Finance Conference 2024
Topics: Treasury demand elasticity; arbitrageurs; term premia. Area: Treasury Markets and Financial Intermediation.
Different investors absorb different parts of Treasury supply, and arbitrageurs connect those segments. We estimate sector-by-maturity Treasury demand and embed it in a model with risk-averse arbitrageurs. The results show that Treasury-market elasticity is much higher at the short end than at longer maturities because T-bill arbitrage is safer. Cross-maturity substitution is also central for monetary-policy transmission: tightening raises term premia only when investors can substitute across maturities.
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}
}
AEA
Jansen, Kristy, Wenhao Li, and Lukas Schmid. 2025. “Granular Treasury Demand with Arbitrageurs.” NBER Working Paper 33243.
Revise & Resubmit at The Journal of Finance
Topics: Treasury convenience; inflation; safe assets. Area: Liquidity Value of Government Debt.
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},
url = {https://www.nber.org/papers/w32881}
}
AEA
Cieslak, Anna, Wenhao Li, and Carolin Pflueger. 2024. “Inflation and Treasury Convenience.” NBER Working Paper 32881.
Published Papers
Arthur Warga Award for Best Paper in Fixed Income, SFS Cavalcade, 2020
Topics: Treasury supply; bank funding; deposits. Area: Treasury Markets and Financial Intermediation.
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},
url = {https://authors.elsevier.com/c/1nV7z,6wzylJEU}
}
AEA
Li, Wenhao, Yiming Ma, and Yang Zhao. 2026. “The Passthrough of Treasury Supply to Bank Deposit Funding.” Journal of Financial Economics.
Media: Central Banking · PR Newswire
Topics: credit intervention; financial crises; firm dynamics. Area: Financial Crises and Government Interventions.
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}
}
AEA
Li, Wenhao, and Ye Li. 2025. “Firm Quality Dynamics and the Slippery Slope of Credit Intervention.” Review of Economic Studies. https://doi.org/10.1093/restud/rdaf100.
Topics: financial crises; intermediation; sentiment. Area: Financial Crises and Government Interventions.
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}
}
AEA
Krishnamurthy, Arvind, and Wenhao Li. 2025. “Dissecting Mechanisms of Financial Crises: Intermediation and Sentiment.” Journal of Political Economy 133 (3): 935–985. https://doi.org/10.1086/733423.
2019 Cubist Systematic Strategies Ph.D. Candidate Award for Outstanding Research
Topics: public liquidity; financial crises; bank fragility. Area: Financial Crises and Government Interventions.
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}
}
AEA
Li, Wenhao. 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}
}
AEA
Fan, Benjamin, Edward Qiao, Anran Jiao, Zhouzhou Gu, Wenhao Li, and Lu Lu. 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.
Topics: Treasury yield curve; intermediary balance sheets; market structure. Area: Treasury Markets and Financial Intermediation.
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}
}
AEA
Du, Wenxin, Benjamin Hébert, and Wenhao Li. 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.
Arthur Warga Award for Best Paper in Fixed Income, SFS Cavalcade, 2022
Topics: near-money; Treasury bonds; liquidity services. Area: Liquidity Value of Government Debt.
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}
}
AEA
Krishnamurthy, Arvind, and Wenhao Li. 2023. “The Demand for Money, Near-Money, and Treasury Bonds.” Review of Financial Studies 36 (5): 2091–2130. https://doi.org/10.1093/rfs/hhac074.