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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 has a negative primary balance and downward-sloping 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, each round worsens the fiscal position and requires progressively larger interventions to maintain low rates, until financing costs rise sharply. 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@unpublished{merkel2026quantitative,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.
Topics: government debt valuation; investor beliefs; safe-asset demand. Area: Government Debt Valuation and Sustainability.
What ultimately supports the market value of U.S. government debt? We measure valuation frameworks: the perceived channels that back debt value. We survey bond investors, registered voters, and economics or finance graduate-degree holders, asking them to allocate debt value across six sources derived from open-ended answers and the literature. Global safe-asset demand and permanent rollover together account for almost half of perceived value in every group, so debt value heavily relies on investor absorption rather than on conventional fiscal fundamentals. Future primary surpluses, the textbook debt backing, receive about 16% even among the graduate-trained; roughly one-third say they provide little or no support. Allocations concentrate within respondents but disperse across them, forming belief archetypes that vary little with fiscal knowledge. A model shows why belief elicitation matters: identical debt quantities and price schedules can conceal differences in saleable public backing and in investors’ willingness to hold government debt under stress. These differences imply different degrees of debt sustainability. Concern about debt sustainability is widespread, and all three groups put the ten-year crisis odds near 50%. However, among respondents expressing concern, 90% of voters report that it is not decisive in their voting decisions, and 72% of investors report no concrete portfolio change.
BibTeX
@unpublished{delao2026beliefs,
author = {Delao, Ricardo and Li, Wenhao},
title = {Beliefs about Government Debt Valuation and Sustainability},
year = {2026},
note = {Working paper},
url = {https://papers.ssrn.com/sol3/papers.cfm?abstract_id=7218578}
}
AEA
Delao, Ricardo, and Wenhao Li. 2026. “Beliefs about Government Debt Valuation and Sustainability.” Working paper.
Topics: Treasury-market resilience; investor demand; Fed balance-sheet policy. Area: Treasury Markets and Financial Intermediation.
How resilient is the U.S. Treasury market to foreign selling, inflation, and quantitative tightening? We answer this question by embedding an empirically estimated sector-level Treasury demand system in a forward-looking equilibrium model with risk-averse arbitrageurs who price expected future demand. Equal-sized foreign dollar retrenchments from different countries generate heterogeneous yield responses because countries differ in their maturity composition, yield elasticities, and macroeconomic sensitivity. Inflation affects long-term yields through opposing portfolio reallocations: falling foreign official demand amplifies the response, while the Fed’s demand response offsets it. Retrenchment by foreign official holders therefore reduces Treasury yields’ sensitivity to subsequent inflation shocks. At longer maturities, the yield impact of QT depends more on expected state-contingent Fed support than on the immediate reduction in the Fed’s Treasury holdings. Treasury-market resilience therefore depends on who absorbs the shock, whether it persists, and how policy responds, not on the size of the shock alone.
BibTeX
@unpublished{jansen2026resilience,
author = {Jansen, Kristy A. E. and Li, Wenhao and Schmid, Lukas},
title = {Dissecting Treasury Market Resilience},
year = {2026},
note = {Working paper},
url = {https://papers.ssrn.com/sol3/papers.cfm?abstract_id=7249720}
}
AEA
Jansen, Kristy A. E., Wenhao Li, and Lukas Schmid. 2026. “Dissecting Treasury Market Resilience.” Working paper.
Revise & Resubmit at The Journal of Finance
Best Paper Award, JHU Carey Finance Conference 2024
Topics: Treasury demand elasticity; arbitrageurs; term premia. Area: Treasury Markets and Financial Intermediation.
We show that understanding the Treasury market requires both estimating granular investor demand and structurally modeling arbitrageurs. Using a new dataset of sector-level U.S. Treasury holdings, we estimate demand functions that exhibit strong cross-maturity substitution. Embedding these estimates in an equilibrium model with risk-averse arbitrageurs yields two main findings. First, Treasury market elasticity is steeply downward sloping in maturity, with very high elasticity in the T-bill market; without structurally modeling arbitrageurs, a pure demand system implies implausibly low T-bill elasticity. Second, cross-maturity substitution implies that monetary tightening raises term premia; without it, as in baseline preferred habitat models, the prediction reverses.
BibTeX
@techreport{jansen2024granular,
author = {Jansen, Kristy and Li, Wenhao and Schmid, Lukas},
title = {Granular Treasury Demand with Arbitrageurs},
year = {2024},
number = {33243},
institution = {National Bureau of Economic Research},
type = {Working Paper},
doi = {10.3386/w33243},
url = {https://www.nber.org/papers/w33243}
}
AEA
Jansen, Kristy, Wenhao Li, and Lukas Schmid. 2024. “Granular Treasury Demand with Arbitrageurs.” NBER Working Paper 33243.
Revise & Resubmit at The Journal of Finance
Topics: Treasury convenience; inflation; safe assets. Area: Government Debt Valuation and Sustainability.
We document that U.S. Treasury convenience yields 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. The model estimates an increased relative importance of liquidity demand shocks after 2000. This channel weakens the convenience–inflation comovement and contributes to negative bond-stock betas, as distinct 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},
volume = {184},
pages = {104334},
doi = {10.1016/j.jfineco.2026.104334},
url = {https://doi.org/10.1016/j.jfineco.2026.104334}
}
AEA
Li, Wenhao, Yiming Ma, and Yang Zhao. 2026. “The Passthrough of Treasury Supply to Bank Deposit Funding.” Journal of Financial Economics 184: 104334. https://doi.org/10.1016/j.jfineco.2026.104334.
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 have offered funding directly to nonfinancial firms, bypassing banks and other credit intermediaries. We analyse the long-term consequences of such policies by focussing 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 the firm quality distribution necessitates larger interventions in future crises. Our mechanism is quantitatively important: we show that if policymakers 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. We confront the model with data on credit spreads, equity prices, credit, and output across the financial crisis cycle. In particular, we ask the model to match 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 post-crisis period characterized by a slow recovery in output. Our model with the frictional intermediation mechanism and fluctuations in beliefs provides a parsimonious account of the entire crisis cycle. The model with only the frictional intermediation mechanism misses the frothy pre-crisis behavior; fluctuations in beliefs resolve this problem. On the other hand, modeling the belief variation via either a Bayesian or diagnostic model match the broad patterns, with each missing some targets to different extents. We also show that a lean-against-the-wind policy has a quantitatively similar impact in both versions of the belief model, indicating that policy need not “get into the minds” of investors and condition on the true belief process.
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 and expands bank lending, but it 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 policies raise bank fragility against non-financial shocks such as COVID-19.
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
Topics: deep learning; dynamic macro-finance models; financial frictions. Area: Financial Crises and Government Interventions.
Deep learning has been shown to be an effective method for solving partial differential equations (PDEs) by embedding the PDE residual into the neural network loss function. In this paper, we design a methodology that utilizes deep learning to simultaneously solve and estimate canonical continuous-time general equilibrium models in financial economics, including (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.
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: Government Debt Valuation and Sustainability.
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.