Zhen Huo Publications

This article provides a general framework to study the role of production networks in international GDP comovement. We first derive an additive decomposition of bilateral GDP comovement into components capturing shock transmission and shock correlation. We quantify this decomposition in a parsimonious multi-country, multi-sector dynamic network propagation model, using data for the G7 countries over the period 1978–2007. Our main finding is that while the network transmission of shocks is quantitatively important, it accounts for a minority of observed comovement under the estimated range of structural elasticities. Contemporaneous responses to correlated shocks in the production network are more successful at generating comovement than intertemporal propagation through capital accumulation. Extensions with multiple shocks, nominal rigidities, and international financial integration leave our main result unchanged. A combination of TFP and labour supply shocks is quantitatively successful at reproducing the observed international business cycle.

This paper characterizes the effects of ambiguity aversion under dispersed information. The equilibrium outcome is observationally equivalent to a Bayesian forecast of the fundamental with increased sensitivity to signals and a pessimistic bias. This equivalence result takes a simple form that accommodates dynamic information and strategic interactions. Applying the result, we show that ambiguity aversion helps rationalize the joint empirical pattern between the bias and persistence of inflation forecasts conditional on household income. In a policy game à la Barro and Gordon (1983) with ambiguity-averse agents, the policy rule features higher average inflation and increased responsiveness to fundamentals.

We propose a theory of gradualism in the implementation of good policies, suitable for environments featuring time consistency. We downplay the role of the initial period by allowing agents both to wait for future agents to start equilibrium play and to restart the equilibrium by ignoring past history. The allocation gradually transits toward one that weighs both short- and long-term concerns, stopping short of the Ramsey outcome but greatly improving upon Markovian equilibria. We use the theory to account for the slow emergence of both climate policies and the reduction of global tariff rates.