Research

Working Papers

1. Bank Credit and Firms’ Attention to Inflation

   (joint with Tiziano Ropele)

   Submitted

   Using matched Italian firm-level administrative and survey data, we provide causal evidence that financing structure shapes firms’ attention to inflation. Firms more reliant on bank credit are better informed about inflation and make smaller forecast errors. In randomized information treatments, they revise expectations less after receiving public inflation information, indicating more precise priors. We rationalize the evidence with a partial-equilibrium rational-inattention model in which firms’ exposure to inflation-sensitive financing costs raises the value of information. Heterogeneous financing structures generate dispersed inflation expectations and imply that more aggressive monetary-policy responses to inflation increase firms’ attention, shaping policy transmission through information channels.

   [Draft] [Slides]

   Recommended citation: Zhenghua Qi, Tiziano Ropele. "Bank Credit and Firms’ Attention to Inflation." Working paper (2026) http://zhenghua-qi.github.io/files/JMP_latest.pdf

2. Endogenous Firm Entry and the Monetary Policy ‘Room’

   (joint with Marc Dordal i Carreras and Seung Joo Lee)

   Submitted

   We present a tractable New Keynesian model featuring endogenous firm participation. Entry-induced short-run shifts in aggregate supply shape the economy’s response to both supply and demand shocks. In particular, rising aggregate demand induces entry, expanding supply and reinforcing demand through investment expenditures of operating firms. Monetary policy influences both aggregate demand and the entry decisions of financially constrained firms, shaping cycle dynamics in economies with high entry potential. Equilibrium firm entry is determined by the “policy room”, a sufficient statistic for the effectiveness of monetary policy in both the model and empirical data.

   [Draft] [Slides]

   Recommended citation: Dordal i Carreras, Marc, Seung Joo Lee, and Zhenghua Qi. "Endogenous Firm Entry and the Monetary Policy `Room'." Working Paper (2024). http://zhenghua-qi.github.io/files/draft_ADAS.pdf

In Progress

1. Scarring Effects of Macroeconomic Conditions on New Firms

   In Progress

   This project explores the persistent effects of economic conditions when businesses enter into the market on the financing composition over the lifecycle. Since infant businesses’ behaviors have sizable aggregate implications in job creation and investment, it is important to understand how the starting conditions affect new firms’ ability to obtain financing and their long-run growth potential. Using firm-level data from Orbis and employing the local projection method, I provide new evidence that firms undergo credit contractions in their initial three years, start with a lower debt-to-equity ratio, and maintain this low leverage for the following six years. Additionally, these infant businesses have a larger share of tangible fixed assets, exhibit lower labor productivity, and have a lower investment ratio compared to their older counterparts. I further show that this persistence is linked to financial constraint: infant firms operating in sectors with high external financial dependence exhibit persistent differences in their balance sheet characteristics, productivity, and investment patterns. The empirical findings suggest a story with credit reputation accumulation. Due to imperfect information, a firm’s quality is gradually revealed through interactions with financial institutions. Firms born during credit tightening start with low leverage ratios, which hampered their ability to attain external funding in the future due to the slow buildup of their credit reputation. In contrast, older firms whose quality is already better known by the financial market face less persistent impacts from the tighter credit conditions. Meanwhile, the aggregate economic conditions encourage the formation of low-leverage businesses, leading to a compositional effect.

2. Diagnostic expectations in housing price dynamics

   (joint with Byoungchan Lee)

   In Progress

   Using the Survey of Consumer Expectations, I find the predictability of forecast error on the forecast of the housing price growth rate. Overestimation is followed by disappointment in the housing market. To address the predictability issue without rational expectations (RE), I introduce the diagnostic expectation (DE) into a two-agent New Keynesian framework to understand the role of over-optimism from DE in influencing housing price dynamics and business cycles. Firstly, the DE significantly outperforms RE in affecting the responses of housing price, consumption, output, and other variables to TFP shock in magnitude and persistence. The DE plays a significant role in affecting both the extensive and intensive margins of the housing market. Secondly, the DE can generate a positive residential housing value share response that is consistent with the data. The key mechanism comes from the strengthened income effect and consumption smoothing under overreaction. Thirdly, the monetary policy rule’s impacts on the DE mechanisms suggest important policy implications.

   Recommended citation: Byoungchan Lee, Zhenghua Qi. " Diagnostic expectations in housing price dynamics." Work In Progress (2021).