"Inflation Expectations of Households and the Upgrading Channel."

(with Sumit Agarwal and Changcheng Song),  Journal of Monetary Economics, Volume 128, May 2022, Pages 124-138.

Abstract: Motivated by the evidence that households purchased better quality goods across time in Singapore, we use a survey experiment to study the relationship between consumption upgrading and households’ beliefs about inflation. We find that providing price information on better-quality products will lead to higher inflation expectations. The effects on inflation expectations are smaller when price information on both higher- and lower-quality products is made available, suggesting that product replacement increases inflation expectations. Additional tests show that our results are not driven by mixing price with quality or numeracy. Our findings highlight the relationship between product replacement, product variety, and inflation expectations.

"FinTech and Household Finance: A Review of the Empirical Literature"

(with Sumit Agarwal), China Finance Review International, 2020

Winner of the Emerald Literati Awards for Outstanding Paper

Abstract: This paper reviews recent advances in the empirical literature of FinTech and household finance. We survey the effects of FinTech on three different aspects of household finance: payments, lending and portfolio decisions. Specifically, we examine the impact of digital payments, mobile money, FinTech lending, marketplace lending, robo-advising and crowd-funding. Studies suggest that FinTech has positively benefited households by increasing consumption and borrowing. This allows them to smoothen their consumption across time. Furthermore, there is an improvement in their portfolio diversification. Nonetheless, there is also evidence that certain households overconsume and borrow beyond their means. Despite the importance of this topic, there has been a lack of empirical evidence until recently. In this paper, we take stock of the empirical evidence in the literature through the lens of household finance

Working Papers

Abstract: This paper investigates how carbon tax aversion impacts the macroeconomy. Through an analysis of carbon tax announcements in Alberta, we first provide empirical evidence that carbon taxes result in the formation of pessimistic macroeconomic beliefs, characterised by higher inflation expectations and lower expected real income. We term these beliefs as carbon tax aversion in the macroeconomy and incorporate them into a two-sector New Keynesian model that departs from the standard assumption of rational expectations. From our benchmark model, we find that carbon tax aversion exacerbates output losses but stabilizes aggregate prices after carbon tax announcements. With carbon tax aversion, the announcement of a 1% increase in carbon taxes results in larger output losses by 0.3% but smaller decrease in aggregate prices by 0.02%, relative to the rational expectations model. Furthermore, earlier announcements result in lower output losses. Our findings highlight the importance of managing pessimistic beliefs against carbon taxes and the role of central banks in supporting the green transition.

Abstract: Using micro-level administrative data from India, we show the consumption and portfolio rebalancing response of households to changes in interest rate. Exploiting variation in the timing of expiry of term deposits, we find that when interest rate falls, households increase consumption by 6 percent and increase their fraction of wealth into risky assets by 36 percent after the expiry of term deposits. While both existing and new investors “reach for income” by investing in high dividend stocks, new investors also “reach for yield” by investing in high beta and more volatile stocks. The effects on consumption and risky investment are smaller for term depositors with automatic renewal. Households with more liquid wealth have a smaller consumption effect but a larger portfolio rebalancing effect on risky investment. These results highlight that term deposits contract rigidity and household wealth affects the monetary policy pass-through.

Abstract: This paper exploits a natural experiment in India – Inflation Targeting to study how changes in inflation expectations influence households’ consumption and portfolio choices. Using regional heterogeneity in inflation expectations due to the Inflation Targeting policy, we find that households with high liquid wealth decreased consumption and increased savings when faced with a fall in inflation expectations. Moreover, they rebalanced their portfolio from risky investments towards bank deposits. This is attributed to the nominal rigidity of savings deposit rate. In comparison, households with low liquid wealth consume more and save less as inflation expectations fell. Our findings provide direct evidence on how the transmission of inflation expectations through different economic channels is influenced by the household balance sheet.

Abstract: We study how learning in credit markets affects the conduct of macroprudential policy. Due to the informational content of credit prices, there is heightened optimism when credit spreads are reduced through an unanticipated macroprudential policy. Consequently, lenders charge an even lower credit spread, amplifying the effects of the initial macroprudential policy. Borrowers experience different outcomes based on their financial position. While increased investment leads to a further reduction in credit spreads for low-leverage firms, high-leverage firm over-borrow, resulting in higher credit spreads that dampens the initial policy effects. Our findings suggest that in setting optimal macroprudential policies, regulators should internalize their actions on credit market expectations. How optimal policy should change is dependent on whether learning from credit spreads amplify or dampen the initial policy effects.

Abstract: This paper investigates the impact of socially responsible investment on individuals’ risk taking behavior and portfolio rebalancing decisions. We find that concerns for social responsibility do not impact stock market participation and willingness to take risk but simply alter individuals’ preference among risky assets. Through our experiment, subjects allocate endowments among one risk-free asset and two risky assets. For one risky asset, we vary the characteristics in four conditions. Relative to the control condition, this risky asset yields additional payments for subjects themselves in one treatment, and for charities in the remaining two treatments. Our results show that additional payments for oneself encourage risk taking behavior and trigger rebalancing across different risky assets. However, payments for charities solely induce rebalancing. This finding is consistent across different interest rates and risk levels. As traditional mean-variance analysis has difficulties in explaining these observations, we propose a framework of narrow framing, whereby individuals only consider social responsibility in the account for risky investments.

"Tail Risk and Expectations" 

(with Zu Yao Hong) 

Abstract: This study examines how the beliefs of tail risk events influence macroeconomic expectations. By incorporating tail risk in a Bayesian learning model with noisy signals, we theoretically and empirically show that individuals overreact when faced with first and second moment shocks. First moment shocks result in excessive optimism and pessimism in individuals as they provide valuable information about tail risk. Second moment shocks lead to more pessimistic forecasts as higher uncertainty is linked to an increased likelihood of disasters. As signals becomes noisier, the response to news regarding a first moment shock becomes more pronounced. Our findings shed light on factors driving overreaction in expectations and highlight the importance of uncertainty shocks in propagating macroeconomic stability.