During the 1999-2009 U.S. housing cycle, two opposing empirical facts present a puzzle: the correlation between income growth and mortgage growth is negative across ZIP codes within metropolitan areas (some argue for the ‘credit expansion' view) but positive across metropolitan areas (others argue for the ‘speculation' view). First, I show that the cross-metropolitan phenomenon, in fact, is also consistent with the ‘credit expansion' view: by an instrumental variable approach, I show that net export growth across metropolitan areas causes both income growth and credit expansion in mortgage growth, which eventually leads to the housing cycle. I also design five tests with detailed measures to show that credit expansion rather than speculation plays the dominant role. Second, I develop a new theoretical model that, for the first time in the literature, reconciles the above two seemingly opposing empirical facts in the ‘credit expansion' view. Third, my theoretical model generates new predictions of ‘double differences' in the literature: the differential stronger boom and bust cycle in mortgages (and house prices) in low-income ZIP codes than in high-income ZIP codes within metropolitan areas is more pronounced in high net-export-growth metropolitan areas. I provide empirical causal evidence for these new predictions, further supporting the ‘credit expansion' view.

Presentation: ASU PhD Seminar, ASU Browbag,  2024 Eastern Finance Association, Georgia Institute of Technology, 2024 Econ Graduate Students' Conference at WashU

Empirical business cycle studies using cross-country data usually cannot achieve causal relationships while within-country studies mostly focus on the bust period. We provide the first causal investigation into the boom period of the 1999-2010 U.S. cross-metropolitan business cycle. Using a novel research design, we show that credit expansion in private-label mortgages causes a differentially stronger boom (2000-2006) and bust (2007-2010) cycle in the house-related industries in the high net-export-growth areas. Thus, our results are consistent with the credit-driven household demand hypothesis. Most importantly, our unique research design enables us to perform the most comprehensive tests on theories (hypotheses) regarding the business cycle. We show that the following theories (hypotheses) cannot explain the cause of the 1999-2010 U.S. business cycle: the speculative euphoria hypothesis, the real business cycle theory, the collateral-driven credit cycle theory, the business uncertainty theory, and the extrapolative expectation theory.

This paper provides the first causal evidence that credit supply expansion caused the 1999-2010 U.S. business cycle mainly through the channel of household leverage (debt-to-income ratio). Specifically, induced by net export growth, credit expansion in private-label mortgages, rather than government-sponsored enterprise mortgages, causes a much stronger boom (1999-2005) and bust (2008-2014) cycle in household leverage in the high net-export-growth metropolitan areas. In addition, such a stronger household leverage cycle creates a stronger boom and bust cycle in the local economy, including housing prices, residential construction investment, and house-related employment. Thus, our results are consistent with the credit-driven household demand channel (Mian and Sufi, 2018). Further, we show multiple pieces of evidence against the corporate channel, which is emphasized by other business cycle theories (hypotheses).

Presentation: ASU Ph.D. Seminar, Georgia Institute of Technology, 2024 Financial Management Association Annual Meeting

This paper establishes the causality between export growth and increased corporate innovation in quantity and quality in US public firms by using a novel gravity model-based instrument from international economics. Strong empirical evidence shows up in various measures of innovation, including the number of patents, number of citations, scaled number of citations, and average number of citations. In addition, this paper uncovers three mechanisms through which export increases firm innovation: (1) export growth increases sales and Research & Development; (2) export growth induces experienced inventors to reallocate towards industries with more export growth and new-generation inventors to start their careers in these industries; (3) export growth also increase institutional ownership percentage and concentration in these industries, which have been shown to increase innovation via reducing career risk faced by managers. 

Traditional views believe worsening local economic conditions caused the 2007-2009 banking crisis via mortgage defaults on the balance sheet (Aubuchon and Wheelock, 2010). This project tries to show two important departures: (1) the main losses are caused by off-balance-sheet securitized mortgages rather than on-balance-sheet mortgages, and (2) bank credit expansion (in response to promising local economic conditions) causes the worsening local economic conditions.