Interview with incoming Faculty member Chen Lian

We are thrilled to welcome Professor Chen Lian who has joined the UC Berkeley Economics Department as an Assistant Professor this summer.

Professor Chen Lian, who graduated in 2020 with his Ph.D. from MIT, joined the UC Berkeley Economics Department as an Assistant Professor in July 2020. His main field of research focuses on macroeconomics, behavioral economics, and finance. In recent works, he designs a framework to systematically study how behavioral biases impact consumer decisions. His work also touches on macro-finance. He has taken a deep dive into how firms may face constraints when obtaining financing.

PhD student Todd Messer interviewed Professor Lian on his work and research.

Messer: Can you talk a little about yourself, where you're from and where you grew up? Were there role models or specific people in your life that inspired you to go into this field?

I grew up in Nanjing, China. Then I came to Boston for college and graduate school. Really looking forward to moving to the Bay area to start a new adventure. 

Reading Daniel Kahneman’s book Thinking, Fast and slow is an eye-opening experience for me. I have long felt the rationality assumption in standard economic models is hard to swallow. Kahneman’s book and research provide an alternative framework to systematically think about human decision making. He inspires my interest in behavioral economics.

Messer: What ultimately made you decide to come to UC Berkeley? 

Berkeley has a very good reputation for being genuinely supportive of assistant professors. The economics department is also very strong in fields related tomy interests, i.e., macroeconomics and behavioral economics.

Messer: Let's move to your research, starting with your dissertation. You start from the famous observation that consumers systematically violate the permanent income hypothesis and often display high marginal propensities to consume (MPCs). How has your work contributed to the large literature on understanding frictions in consumption behavior?

The classical explanation of the violation of the permanent income hypothesis and in particular high MPCs is liquidity constraints. However, there is a lot of recent evidence that high-liquidity consumers also display similar behavior. This evidence is hard to square with

canonical liquidity-constraints-based explanations and motivates my study which focuses on behavioral explanations. 

Messer: How might your approach differ from other behavioral theories of consumption?

There are of course many behavioral approaches that can explain deviations from the permanent income hypothesis and lead to high MPCs. Unfortunately, the myriad of potential biases can sometimes make non-behavioral economists lost about what the actual take-home lessons. In this paper, different from the existing behavioral literature, I do not take an exact stand on what the underlying behavioral biases are. I instead show how anticipation of future consumption smoothing mistakes alone, no matter the exact behavioral causes, can explain those violations. In this sense, my paper tries to study robust predictions independent from the exact behavioral mistakes.

Messer: You have also begun to research how firms obtain financing. How did you start thinking about these types of questions, and why might they be important today?

We actually have a quite fun backstory of the corporate borrowing paper. I was taking a Ph.D. class on borrowing constraints while my coauthor is taking a MBA class on borrowing constraints. We realize that the academic take and the practical take on corporate borrowing constraints are quite different, and it is important to bridge the gap. In particular, we document the importance of “earnings-based borrowing constraints,” which restricts total corporate borrowing as a function of firm’s total operating earnings.

Messer: How might these different types of borrowing constraints affect the transmission of economic policy (monetary and fiscal)?

I have long suspected that the transmission of economic policies comes more from “quantity” instead of “prices.” In the context of how monetary and fiscal policy impact corporate borrowing, I think the impact of these policies on corporate earnings and the subsequent impact on corporate borrowing through earnings-based constraints can be important. There is also suggestive evidence along this line in Cloyne, Ferreira, Froemel, and Surico (2020). On the other hand, the neoclassical channel through interest rates may not be as powerful.

Messer: It's hard not to think about the COVID-19 pandemic, and so reading through your work I was constantly relating it to the current crisis. We've seen both stimulus checks mailed to households and massive intervention in corporate lending markets for both large and small firms. How can your work help us understand the effectiveness of such interventions?

From the empirical evidence (e.g. Chetty et al., 2020), the CARES act has done a reasonably good job in stabilizing the spending of relatively low-income households. A major roadblock to the recovery seems to be the sustained decline in the spending of relatively high-income households, which also has trickle-down impact on low-income households based on the evidence in Chetty et al. (2020). I think it might be important to find a way, ideally revenue neutral, to incentivize relatively rich households to increase their spending.

On the corporate side, obviously the pandemic raises the possibility of a doom loop among earnings drop, covenant violations, and eventual corporate bankruptcy. The Fed programs and the CARES act seem to have helped tremendously. A major challenge seems to be how to accurately target firms truly in need while minimizing program abuse. 

Messer:Throughout your work, you ask how individuals form expectations of the future. Clearly, there is a lot of uncertainty about what an economic recovery may look like.  Do you have any thoughts about how differences in household expectations may shape the recovery?

There seems to be a lot of disagreement on the length of the crisis, the trajectory of COVID recovery, and the timeline for vaccine. This means that, even if a household or a firm is confident about the recovery, she may be hesitant in her economic decisions because she is worried that other economic agents are pessimistic. This is a channel that I am trying to study.

Messer: Can you give us a preview of any other papers you might be working on? Are there any other researchers here at UC Berkeley, both in the Economics department and beyond, with whom you may want to start working?

I am recently working on a paper called “Confidence and the Propagation of Demand Shocks” with George-Marios Angeletos. Motivated by empirical evidence on the importance of non-inflationary demand shocks and the elusiveness of the Phillips curve, we try to design a new business cycle theory that is Keynesian in the sense of letting aggregate demand shocks be the main business-cycle driver but neoclassical in the sense of not relying on nominal rigidity. The theory has two key elements: first, we introduce intertemporal substitution in production to allow aggregate supply to respond to aggregate demand without nominal rigidity; second, we introduce a “confidence multiplier,” namely a positive feedback loop between real economic activity, consumer expectations of permanent income, and investor expectations of returns. The second element is actually inspired by the pioneering Berkeley economist Akerlof’s book on Animal Spirits (joint with Robert Shiller).

Messer: As a graduate student at MIT, what were some valuable lessons you would share, and perhaps suggestions for up and coming graduates?

There are two lessons that I would love to tell my “younger self” who just entered graduate school. First, understanding that everything in the world and especially economics research is constantly changing. Be comfortable about adapting and reinventing myself. Second, finding some passion outside economics. They in the end will make the process of economics research more sustainable too. On another note, I am really looking forward to collaborating with economists in the Berkeley community.

Messer: Finally, any fun plans for what you might do in the Bay Area in a Post-Covid world? I'm sure we could provide a lot of suggestions!

I am actually an avid sports fan. I look forward to my favorite Boston teams visiting the Bay area. It for sure will be a fun experience to support away teams in Bay area stadiums!